ShmoopTube

00:00

And finance Allah shmoop What is implicit GDP price deflator

00:08

Okay people there are price deflator is like you know

00:12

things that would bring down something's price Think two day

00:15

old sushi or Christmas ornaments on sale December twenty sixth

00:20

for a prize show dog that suddenly loses all its

00:24

air Well that's not kind of price deflator we have

00:26

in mind here The GDP price deflator is a measure

00:29

of prices for goods and services produced within a country

00:33

for a period of time It's a way to basically

00:35

track inflation in that country Snow Haven is a tiny

00:42

country located to the north of Greenland The nation boasts

00:45

one hundred twenty residents total each of whom makes a

00:48

living from the production and export of ice sculptures You're

00:51

a Nikon Ph D student working on a thesis Your

00:54

roommate threw a party the day before you were scheduled

00:56

to declare your thesis topic You don't remember much but

00:59

somehow you ended up with a thesis topic centered on

01:01

the economy of snow haven Will you start your research

01:04

first step Calculate how big snow havens economy is Alright

01:08

that's pretty simple To measure economic output Used GDP gross

01:11

domestic product A broad measure of economic production right You

01:14

know what that is You calculate that figure by adding

01:17

up the value of all the goods and services produced

01:19

by an economy during a period of time Well in

01:21

snow havens case where everyone just makes ice sculptures you're

01:24

dealing only with the value of all the ice sculptures

01:27

they make In a more complex economy Like while the

01:29

U S You're dealing with a whole lot more things

01:32

right So all the value of ski news and juicers

01:34

and Oreos that get made in a year as well

01:36

is the value of all the yoga classes and foot

01:39

massages they get done Yet all gets added up will

01:42

notice that the word value keeps coming up here You

01:44

don't count the number of goods made or the number

01:47

of services rendered You count the value of those goods

01:51

and services like the dollar value of them If you

01:54

just counted the number of goods like the volume well

01:56

then making a bar of soap might count the same

01:59

as making a passenger jet right one for one it

02:02

doesn't quite work The soap is one thing The jets

02:04

another but obviously more goes into making the jet and

02:06

a bunch More people have to work a lot more

02:08

to get that jet made so it should count a

02:10

lot more to GDP right has more value than a

02:12

bar So so to give everything the proper waiting in

02:14

the GDP figure the currency value of the stuff gets

02:17

all out of together The soap contributes Ah fifty cents

02:21

of GDP and the jet contributes an thirty eight million

02:24

But there's an issue that comes up with this method

02:27

GDP gets impacted by price changes meaning inflation gets counted

02:31

as growth prices rise GDP rise is whether or not

02:35

actual output goes up We have to adjust for that

02:38

So this year the people of Snow Haven made twenty

02:40

thousand ice sculptures which sold for an average price of

02:42

a thousand bucks each The math Well that's a thousand

02:45

times twenty thousand or twenty million dollars GDP for the

02:48

year for Snow Haven Yep twenty meg and next year

02:51

they also make twenty thousand sculptures But there's a wave

02:54

of high class art Gallas in Monaco that you know

02:59

needs ice sculptures so that drives the prices higher Average

03:02

price rises to a thousand one hundred dollars each while

03:05

we plug that into the GDP equation and that totals

03:08

of GDP of twenty two million dollars That's ten percent

03:12

GDP growth Massive But all that growth was just from

03:15

inflation And yes it could be pricing power of the

03:18

supplier Ah got higher because they're ice sculptures were more

03:22

in demand and more highly prized But that's not where

03:25

this question's going We're going to say it's on ly

03:27

by inflation that you know prices went up on that

03:30

was kind of it So ideal is an economist You

03:32

want to be able to tell how much changing prices

03:35

contribute to the GDP growth That way you can get

03:38

an accurate picture of what's going on in the economy

03:40

without inflation mucking up the whole situation So for that

03:43

reason there are actually two GDP measures There's nominal GDP

03:47

I even number We just figured out the name of

03:50

the GDP the name of that number It's the raw

03:52

number that includes the price changes And then there's really

03:55

GDP It's an adjusted number where the impact of price

03:59

changes get well soon tricked out Here's where the implicit

04:01

GDP price deflator comes in Then it represents the ratio

04:05

between nominal GDP and riel GDP It shows the impact

04:09

that inflation had on GDP that year so Snow Haven

04:13

has nominal GDP of twenty two million bucks for the

04:15

year But two million of that came from price changes

04:18

so the country's riel GDP was twenty million nominal GDP

04:22

over real GDP twenty two million over twenty million The

04:25

implicit GDP price deflator for the year then yes one

04:29

point one a number above one on the deflator figure

04:32

means prices went up during the period We're going to

04:35

divide by that number and bring him down to the

04:37

real number In other words there was inflation the higher

04:39

the number while the higher the rate of inflation Yeah

04:42

a number below one means that real GDP was higher

04:45

than nominal GDP indicating a drop in general prices like

04:49

deflation Like when you're suddenly evolved Former prize show dog

04:53

also developed a painful infectious skin disease and starts to

04:58

show early signs of rabies Yeah run for the hills 00:05:01.37 --> [endTime] people Yeah

Full Transcript