What is gdp deflator

what is gdp deflator

National Income Accounting

and the GDP Deflator I n order to perform macroeconomic analysis in support of economic policy, it is necessary to collect data over time on key economic variables related to income, employment of resources, price levels, and other indicators of the direction of the business cycle. This collection and analysis of data is called National Income Accounting which represents the tools and methods by which economists and policy-makers measure economic activity and economic growth over time.

There are two types of economic variables used in our analysis: flow variables- -economic activity measured per unit of time and stock variables --measures of economic activity at a point in time. For example:

Flow Variables

  • Income (Household, Per-Capita, National)
  • Budget Deficits
  • Investment Expenditure
  • Consumption Expenditure
  • Any Income Statement measures (Sales Revenue, Gross Profit, Expenses)

Stock Variables

  • Wealth (an accumulation of Savings over time)
  • Debt (an accumulation of borrowing over time)
  • Capital Stock (Factories, Machinery, Inventory, Infrastructure)
  • The Money Supply
  • Any Balance Sheet measures (Assets, Liabilities, Owner's Equity)

Typically most of the common, although not necessarily relevant, measures of economic activity are flow variables. It is important to note that in order to interpret the magnitude of any flow variable, a corresponding time period must be attached (i.e. consumption spending per month, quarter, or year).

The evaluation of economic activity is really about measures of output or changes in output in a given period of time. The expectation is that any past additions to the wealth of a nation, whether it be physical capital or human capital, will lead to growth in current output. These output measures, when stated on a per-capita basis (output per person) can be interpreted as a measure of regional or national standard of living. (SoL) If the growth rate in output exceeds the growth rate in population then living standards are assumed to be rising

SoL = Output

per Capita = Output / Population such that if: %ΔOutput > %ΔPopulation, then, SoL .

Interactive Bar Chart

There are difficulties in attempts to measure output in the aggregate. It is impossible to add different quantities of goods and services together as a single aggregate measure. The quantity of autos produced added to the quantity of apples and quantity of houses gives a meaningless measure:

To overcome this problem of aggregation, economists transform the above sum to a common unit of measure in currency terms. This is accomplished by pre-multiplying each item by its current market price 'Pi '. Thus, instead of adding individual quantities together, economists sum the expenditure for each i th good together:

= Aggregate Expenditure

As will be seen below, the use of market prices and expenditure measures to evaluate economic activity causes other problems in attempts to accurately measure growth in a nation's output over time.

The topic of National Income Accounting begins with the use of two methods to determine this measure of aggregate expenditure:

  1. directly via the expenditure approach (through spending on final goods and services ) or
  2. indirectly via the compensation approach (through payments made to the factors of production in producing goods and services ).

The Expenditure Approach involves collecting data on the major components of spending in a given time period. This spending is in the form of consumption expenditure 'C', investment expenditure 'I', government expenditure 'G', and net-export expenditure 'NX'. When added together these four forms of spending make up what is known as the Gross Domestic Product or GDP for a given economy:

C + I + G + NX = Σ Pi Qi = GDP

Formally defined, GDP represents a measure of the market value of all final goods and services produced and purchased in a given year. In the table below, data are provided for the time period 1960-2000 (in billions of $):

Table 1, Expenditure Categories

Source: digitaleconomist.org

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