Primer: GDP Deflator

In my upcoming book on inflation, the focus is on consumer price indices, but there are other aggregate prices indices that are of interest. In this article, I discuss the GDP deflator.

Note: This article is an unedited draft of a section in my planned book “What is Inflation?” As the title suggests, the book is meant to be introductory — what inflation is, and not theories about inflation. I hope that it will be fairly easy to finish off, and would be a shorter primer sold at a cheaper price. I was hoping to publish this last week, but events meant that I switched to a summer publishing schedule earlier than planned. (A family of skunks moved in under my shed, and so I had to do some landscaping work to critter-proof it. I was forced to concentrate on the work last week due to working around weather forecasts.) I hope to stick to at least one article per week, although if it heats up, I might hide inside with the air conditioning and write.


Definition

Gross Domestic Product (GDP) is the measure of all final goods and services (measured at market prices) produce in an accounting period, such as a quarter of a year in a country. (Definition adapted from Macroeconomics, by Mitchell, Wray, and Watts.) It is the broadest measure of the activity of an economy, and GDP growth is often taken to be a synonym for economic growth.

There are two ways of defining GDP: in nominal or real terms.

  • Nominal GDP is the size of the economy, as measured by the domestic currency unit. For example, U.S. nominal GDP is measured in U.S. dollars.

  • Real GDP is the size of the economy in terms of some constant measuring power. That is, if real GDP grows, that means that there are more goods and services produced, ignoring the effect of inflation. By contrast, we could have a situation where the amount of real goods and services being produced is constant, but their prices are rising. In that case, real GDP is constant, but nominal GDP would increase.

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Disclaimer: This article contains general discussions of economic and financial market trends for a general audience. These are not investment recommendations tailored to the particular needs of an ...

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