1. The following data is given for a Country which only produces two goods (A and B) for the base year (Ym) and the current year (Yn). YmYnGoodPriceQuantityPriceQuantityAPAmQAmPAnQAnBPBmQBmPBnQBnWhat is the expression for GDP deflator for the current year?
Question
1. The following data is given for a Country which only produces two goods (A and B) for the base year (Ym) and the current year (Yn). YmYnGoodPriceQuantityPriceQuantityAPAmQAmPAnQAnBPBmQBmPBnQBnWhat is the expression for GDP deflator for the current year?
Solution
The GDP deflator is a measure of the price level of all domestically produced final goods and services in an economy. It's a ratio of the value of goods/services in current year prices (nominal GDP) to the value of goods/services in base year prices (real GDP), expressed as a percentage.
The formula for the GDP deflator is:
GDP Deflator = (Nominal GDP / Real GDP) * 100
For the current year (Yn), the nominal GDP is the sum of the products of the current prices and quantities of all goods, and the real GDP is the sum of the products of the base year prices and quantities of all goods.
So, the expression for the GDP deflator for the current year is:
GDP Deflator = [(PAn * QAn + PBn * QBn) / (PAm * QAn + PBm * QBn)] * 100
Where: PAn and PBn are the current year prices of goods A and B, respectively, QAn and QBn are the current year quantities of goods A and B, respectively, PAm and PBm are the base year prices of goods A and B, respectively.
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