Exercise: inflation and GDP deflator

You have the following table containing information about country Y's GDP deflator, nominal, and real GDP. If the base year is 2015, fill in the blanks and then find the annual inflation rate for each year.

Year	Nominal GDP	GDP Deflator	Real GDP
2015	$23,457	100	$23,457
2016	$25,752	...	$23,943
2017	$25,982	108.1	...
2018	$26,016	...	$25,431.1
2019	$26,323	105.5	...

Solution:

Year	Nominal GDP	GDP Deflator	Real GDP	Inflation rate
2015	$23,457	100	$23,457	n.a
2016	$25,752	107.6	$23,943	7.6%
2017	$25,982	108.1	$24,035.2	0.45%
2018	$26,016	102.3	$25,431.1	-5.37%
2019	$26,323	105.5	$24,950.6	3.13%

GDP deflator for the year 2018:

$\textit{GDP deflator }_{2018}= \frac{ \$26,016}{ \$25,431.1} \cdot 100\approx 102.3$

Real GDP for the year 2017:

$\textit{Real GDP }_{2017}= \frac{ \100}{ \108.1} \cdot \$25,982\approx \$ 24,035.2$

General formula to find real GDP by re-arranging the GDP deflator formula:

$\textit{Real GDP }_{i}= \frac{ \100}{ \textit{GDP deflator}_i} \cdot \textit{Nominal GDP }_i$

Notice that the sub-index i is for the year.

The (annual) inflation rate is simply the growth rate of prices from a year to its previous year:

$\textit{Inflation rate }_{i}= \frac{ \textit{GDP deflator}_i - \textit{GDP deflator}_{i-1}}{\textit{GDP deflator}_{i-1}} \cdot 100$

Inflation rate of the year 2018:

$\textit{Inflation rate }_{2018}= \frac{ 102.3 - 108.1}{108.1} \cdot 100\approx -5.37%$

Notice that in 2018 country Y experienced a negative inflation rate (i.e deflation). This means that from 2017 to 2018 prices dropped by about 5.3%.

Comments

Macroeconomics: balance of payments accounts

Balance of payment is the sum of three separate accounts and must always be equal to 0 (given no statistical error): Current account: the net flow of funds exchanged for goods and services, and monetary gifts that flow in and out of a country. This is often used as an indicator for net export. Financial account: also known as the capital account, is the net flow of funds for investment in real assets (direct investments) or financial assets (stocks or bonds) into a nation. Official reserves: in order to balance the two accounts above, a country must have a reserve of foreign money. It measures the net effect of all money flows from the other accounts. If the current account is positive, it must be the case that the sum of the financial account and official reserves is negative. Current account (CA) components: Balance of trade in goods: spending by consumers and firms on imported and exported goods. Exported goods have a positive effect on the current account, whereas importe...

Macroeconomics: equilibrium in the AD/AS model

Real output and price level in the AD/AS model: The short run equilibrium in the AD/AS model, is when the intersection between the short run aggregate supply curve and the aggregate demand curve determines the level of output and price level. This short equilibrium output can be compared to the full-employment (i.e long run equilibrium) output by adding the long run aggregate supply curve in the graph. If the difference between the short run equilibrium output and full employment output is negative than we have a recessionary gap. This could be caused by a decrease in households' consumption, a fall in private investments, or a decrease in government spending. If the difference is positive, we have an inflationary gap, where the short run equilibrium output is bigger than its full employment output. This can be caused by an increase in households expenditures, expansionary fiscal policy, etc... If the gap is zero, this means that t...

Microeconomics: Firms and cost in the short run

In Economics, the term short run refers to a time period where at least one variable of interest does not change . In our case, the short run for a firm is when at least one input (labor, land, capital) stays fixed. Usually land and capital are considered fixed in the short run. If an input is fixed during a period time, no matter how much the total product a firm produces, its cost stays the same. This cost is commonly known as fixed cost (FC). Examples of fixed costs: rent, property taxes, loan payments. Labor is often considered to be a part of the variable cost (VC) . Variable cost can be defined as the cost a firm has control over during the short run. Unlike fixed cost, variable cost increases (decreases) as a firm's total product increases (decreases). Examples of variable costs include: utility bills, wages, raw materials A firm's total cost (TC) is the sum of its variable and fixed costs. As you can see, the fixed cost...

Economics and Statistics

Search This Blog