How to calculate GDP Deflator

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How to calculate GDP Deflator

Scenario: A country produces only X and Y; their outputs last year and this year are given in the table below. Calculate the GDP deflator.

Base YearThis Year
Output of X100120
Output of Y4080
Px$20$30
Py$15$20

Applying our GDP Deflator formula...

GDP Deflator = (Nominal GDP / Real GDP) * 100

Calculate Nominal GDP

We can calculate Nominal GDP with the following function:

Nominal GDP = (Qx{this year} * Px{this year}) + (Qy{this year} * Py{this year})

We can plug in the following price values for "this year"...

Base YearThis Year
Output of X100120
Output of Y4080
Px$20$30
Py$15$20

...like so...

Nominal GDP = (Qx{this year} * Px{this year}) + (Qy{this year} * Py{this year})
Nominal GDP = (Qx{this year} * $30) + (Qy{this year} * $20)

...and the following quantity values for "this year"...

Base YearThis Year
Output of X100120
Output of Y4080
Px$20$30
Py$15$20

...like so...

Nominal GDP = (Qx{this year} * Px{this year}) + (Qy{this year} * Py{this year})
Nominal GDP = (120 * $30) + (80 * $20)

...resulting in a nominal GDP of $5200!

Nominal GDP = (Qx{this year} * Px{this year}) + (Qy{this year} * Py{this year})
Nominal GDP = (120 * $30) + (80 * $20)
Nominal GDP = ($3600) + ($1600)
Nominal GDP = $5200

We can plug this nominal GDP in like so:

GDP Deflator = (Nominal GDP / Real GDP) * 100
GDP Deflator = ($5200 / Real GDP) * 100

Calculate Real GDP

We can calculate Real GDP with the following function:

Real GDP = (Qx{this year} * Px{base year}) + (Qy{this year} * Py{base year})

We can plug in the following price values for "base year"...

Base YearThis Year
Output of X100120
Output of Y4080
Px$20$30
Py$15$20

...like so...

Real GDP = (Qx{this year} * Px{base year}) + (Qy{this year} * Py{base year})
Real GDP = (Qx{this year} * $20) + (Qy{this year} * $15)

...and the following quantity values for "this year"...

Base YearThis Year
Output of X100120
Output of Y4080
Px$20$30
Py$15$20

...like so...

Real GDP = (Qx{this year} * Px{base year}) + (Qy{this year} * Py{base year})
Real GDP = (120 * $20) + (80 * $15)

...resulting in a Real GDP of $3600!

Real GDP = (Qx{this year} * Px{base year}) + (Qy{this year} * Py{base year})
Real GDP = (120 * $20) + (80 * $15)
Real GDP = ($2400) + ($1200)
Real GDP = $3600

We can plug this in like so:

GDP Deflator = (Nominal GDP / Real GDP) * 100
GDP Deflator = ($5200 / $3600) * 100

GDP Deflator = (Nominal GDP / Real GDP) * 100
GDP Deflator = ($5200 / $3600) * 100

...we get a value of 144.4!

GDP Deflator = (Nominal GDP / Real GDP) * 100
GDP Deflator = ($5200 / $3600) * 100
GDP Deflator = ($5200 / $3600) * 100
GDP Deflator = (1.444) * 100
GDP Deflator = 144.4