Compendium: GDP Deflator Formula

In earlier entries, we discussed how the Liberal Capitalists rely on Gross Domestic Product (GDP) to gauge the valuations of all economic and financial activities within a nation-state. Included in the discussion were the three equations used to calculate the GDP. The purpose behind the GDP is to calculate the Inflation/Deflation Rate as part of determining the rate of Currency Depreciation/Appreciation as well as price changes. One of the methods commonly explored by Liberal Capitalists is the Consumer Price Index (CPI), which is not an effective method of determining the Inflation/Deflation Rate. Therefore, the GDP Deflator is used as an alternative.

The formula behind the GDP Deflator is designed to calculate the percentage of Inflation/Deflation based on the Nominal GDP and the Real GDP. Its purpose involves gauging any annual changes in Prices of any new goods and services. The GDP Deflator will only record the alterations as a percentage rate Thus, the equation for finding the GDP Deflator looks something like this:

GDP Deflator = (Nominal GDP / Real GDP) * 100

One will immediately note that the Nominal GDP and the Real GDP are the two factors within the equation that are never given numerical values. It should be recalled that the Nominal GDP measures the current Prices without taking into account the Inflation/Deflation Rate. When Liberal Capitalists need to account for the Inflation/Deflation Rate, they will use the Real GDP instead. In order to find either, they need to know the percentage rate from the GDP Deflator. The equations employed in finding either is demonstrated as the following:

Real GDP = (Nominal GDP / GDP Deflator)

Nominal GDP = (GDP Deflator * Real GDP) / 100

What can be discerned from changes in the Nominal or Real GDPs? Generally, a rise in the Nominal GDP implies that the Prices for everyday goods and services have increased over the course of a year. Rising Real GDP indicates a rise in production output, which can be correlated to changes in the Inflation Rate. With the Real GDP, Liberal Capitalists can arrive at conclusions conducive to how much economic growth has occurred in an economy and how much can be written off as the side-effects of increased Inflation. The information acquired from those calculations can inform them of the Value of Kapital, particularly whether it has depreciated or appreciated during a given year. Comparisons can be made between one year and those of another to show the rate of Currency Depreciation/Appreciation in relation to Inflation/Deflation.

With regard to Inflation, Liberal Capitalists have maintained that the Inflation/Deflation Rate should be tilting toward Inflation at a modest 2%. Since Kapital itself is responsible for the effects of Inflation within all economic and financial activities, it becomes realistic to expect economic growth to increase small amounts of Inflation. Having the Inflation Rate at 2% reduces the possibility of Prices depreciating. What that would entail is for the Central Bank to ensure only a limited quantity of Kapital is allowed to exist in circulation.  



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