GDP DEFLATOR AND GNP DEFLATOR

When economists want to observe an increase in the market activity of an economy, they usually look for an increase in GDP.

However, GDP may change for at least one of these reasons

1. The economy is producing a larger output of goods and services

2. Same output being sold at a higher price.

For instance, if €1 billion goods and services were produced at an average price of €8 each, GDP will work out to €1 billion times €8 or €8 billion. 

If in the next year the same output was produced at an average price of €11, then, the nominal GDP will rise to 11 billion.

As you might have observed, GDP rose from 8 billion to 11 billion even though output didn't increase. The reason for this is that the average price rose from €8 to €11.

To address this problem of the rising price level, economist uses a device called GDP deflator

GDP deflator (or implicit price deflator) is a measure of the price level calculated as the ratio of nominal GDP to Real GDP.

It is used to measure changes in the price level of all final goods and services produced in an economy at a given period.

The formula for GDP deflator Is given as

$G.D=\frac{N.GDP}{R.GDP}\times100$

 Where N.GDP is nominal GDP

    and R.GDP is Real GDP

For example, if the Nominal GDP of 2008 is €30 billion and Real GDP is €20 billion, then the GDP deflator is: 

$G.D=\frac{30}{20}\times100$

$G.D=150$

This result means that the average price level has risen by 50 percent from the base year. Stated differently, the result means the rate of inflation has risen by 50 percent

GDP DEFLATOR VS CONSUMER PRICE INDEX (CPI)

The GDP deflator is not the only way to measure the inflation rate, other indexes are also used for measuring inflation.

One of these indexes is the Consumer price index. The consumer price index measures the changes in the price of a fixed basket of goods and services bought by a typical consumer.

Both GDP deflator and CPI measures the same thing, which is, the inflation rate. However, they have marked differences

First, the GDP deflator measures the price level of all goods and services produced domestically whereas the consumer price index measures the changes in the price of goods and services bought by the consumer regardless of where they are produced.

Take note of the world produced and bought domestically. if a consumer buys an imported good, changes in the price of this good will appear in the consumer price index but not the GDP deflator. This is because GDP does not include imports it subtracts all imports.

The second difference is that the GDP deflator accounts for changes in the goods and services bought by the government while CPI does not. 

The reason is that CPI only measures the price of goods and services bought by a typical consumer, not the government.

The last difference is that CPI is usually based on a fixed basket of goods whereas GDP deflator is not based on a fixed basket of goods. So, this means GDP deflator would be able to account for price level better than CPI when the basket of goods changes

GNP DEFLATOR.

GNP, as I told you before, is the market value of all final goods and services produced by a country's citizens at a given period.

When comparing GNP from year to year, we may observe an increase or decrease due to one of the following: 

1. The country's citizens are producing a larger output compared to last year.

2. Same output being sold at a higher price.

Because economist was to be sure that the country citizens are producing more output than before, they use GNP deflator

This is the price index used for measuring the change in the price level of a country. It is the ratio of Nominal GNP to Real GNP.

GNP deflator is used to measure changes in the price level of all final goods and services produced by a country's citizens both domestically and abroad.

The formula for GNP deflator Is given as

$GNP.D=\frac{N.GNP}{R.GNP}\times100$

 Where 

N.GNP is nominal GNP or GNP unadjusted for inflation, or GNP measured at current prices and

R. GNP is a Real GNP or GNP adjusted for inflation or GNP measured at constant prices. 

For example, if the Nominal GNP of 2010 is €10 billion and Real GDP is €8 billion, then the GDP deflator is: 

$G.D=\frac{10}{8}\times100$

$G.D=125$

The result means that the average price of goods and services produced by a country national has risen by 25 percent from the base year.

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DIFFERENCE BETWEEN GNP DEFLATOR AND GNP DEFLATOR

1. GNP deflator is the ratio of nominal GNP to Real GNP whereas GDP deflator is the ratio of nominal GDP to Real GDP.

2. While the GNP deflator shows the changes in the price level of final goods and services produced by a country's citizens, the GDP deflator shows the changes in the price level of final goods and services produced in a country.

Stated differently, the GNP deflator measured the changes in the price level of all final goods and services produced by Nigerians (both domestically and abroad) whereas the GNP deflator measured the changes in the price level of all final and services produced within Nigeria (regardless of who produce it).

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