GDP Deflator

Welcome to another episode of my podcast.

If GDP rise from one year to another, it may be either: 1) the economy is producing more goods and services or 2) goods and services are selling at higher prices. Economist really want to measure the total volume of output of goods and services produced, and not the prices at which these goods and services sell. Economist correct GDP for the effects of inflation,that is, for rising prices. They use the measure of Real GDP and Nominal GDP. The percentage increase in the GDP Deflator from one period to next defines the Rate of Inflation.

Measuring a Nation’s Income

To measure how much output, spending and income has been generated in a given time period, we use National Income Accounts. These accounts measure three things:

1. Output

2. Spending

3. Income

Before computing the National Income the meaning of term ‘National Income’ should be taken up

National Income

National Income is the money value of final flow of output of goods & services produced within an economy over a period of time, usually one year and net income earned from abroad

Gross Domestic Product

Gross Domestic Product (GDP) is the total value of the final goods & services produced within the domestic territorial limits of country over a period of time (1 year).

‘Market Value’ GDP uses market price as it reflects the value of goods. Higher the price higher is the contribution to GDP.

‘Of all’ GDP tries to be comprehensive. It includes all items produced in the economy and sold legally in the market.

‘Final’ GDP includes only the value of final goods and not intermediate goods as it is already included in the price of the final goods. Avoids double counting.

‘Goods and services’ GDP includes tangible goods (cars, clothing etc.) and intangible services (haircut, doctor’s visit etc)

‘Produced’ GDP includes goods and services currently produced and it does not include transaction involving items produced in the past.

‘Within a country’ GDP measures the value of production within the geographic territorial confines of a country, regardless of the nationality of the producer.

‘In a given period of time’ GDP measures the value of production that takes place within a specific interval of time, usually quarterly (3 months) and yearly. Continue reading