Question

What is GDP deflator? Distinguish between Real GDP and Nominal GDP.

Hint:

Remember: GDP deflator = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100. Real GDP adjusts for inflation, while Nominal GDP does not.

Answer 1

Step 1: Define GDP Deflator.
The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. It is calculated by dividing nominal GDP by real GDP and multiplying by 100. The GDP deflator helps to adjust for inflation or deflation in the economy.
Step 2: Explain Real GDP.
Real GDP is the total value of all final goods and services produced within a country's borders, adjusted for inflation. This measure gives a more accurate reflection of an economy's size and performance over time, as it accounts for price changes.
Step 3: Explain Nominal GDP.
Nominal GDP is the total value of all final goods and services produced within a country's borders, measured at current market prices. It does not adjust for inflation, and as such, may overstate or understate the actual growth in an economy.
Step 4: Highlight the Difference.
The main difference between Real GDP and Nominal GDP is that Real GDP is adjusted for inflation, while Nominal GDP is not. This makes Real GDP a better indicator of the true economic growth of a country over time.