Question

“Gross Domestic Product (GDP) Deflator Deflator is represented by the ratio of Real GDP and Nominal GDP.” Do you agree with the given statement? Justify your answer with valid arguments and a hypothetical numerical example.

Hint:

GDP Deflator helps distinguish between real economic growth and inflation by measuring changes in price levels.

Answer 1

Yes, GDP deflator is used to measure the effect of price changes on GDP by comparing Real GDP and Nominal GDP. 

Formula: \[ \text{GDP Deflator} = \left( \frac{\text{Nominal GDP}}{\text{Real GDP}} \right) \times 100 \] 

Example: 

 Interpretation: 
- In 2010, the GDP deflator is 100, meaning the base year price level. 
- In 2015, the GDP deflator rises to 150, indicating a 50 percent increase in price level, despite no change in output. 

Conclusion: The GDP deflator is a useful measure of inflation, showing how much of the GDP growth is due to price changes rather than real output growth.