What is a price deflator ?
A deflator is used to convert data compiled over a period into prices prevailing at an earlier point in time.for example,the current price of a television can be deflated to what it would cost say three years ago.Essentially,a deflator removes the effect of inflation from data,making it comparable across periods.
What is the role of price deflator in GDP calculations ?
Prices are always in a state of flux,but generally move upwards over time.Therefore,a change in prices can give the impression of an increase in the gross domestic product (GDP -- a measure of national income) even without an increase in the quantity of goods and services produced by an economy.The impact of prices has to be removed to arrive at a true measure of economic growth.A deflator is used to restate output estimates at current prices into what they would be if calculated with reference to prices in an earlier year.This will give an idea of the real growth in the economy,minus the price effect.
Why is GDP deflator considered a good measure of inflation ?
The ratio between the GDP at current prices and GDP at constant prices gives an idea of the increase in prices of all goods and services with reference to the base year.In that sense it is a more comprehensive measure of inflation than price indices,which are based only on a limited basket of goods collected from select centres.However,the deflator comes with a lag,which limits its usefulness.
How is it used in India ?
In India a combination of WPI and CPI is used as deflator.The usage is dependent on the particular estimate we are trying to deflate.There will be different deflators for private consumption and government consumption.There is a difference in the value of quarterly and year-end deflators.This is due to the fact that prices are not constant.At the year-end we have an overall measure of WPI/CPI,which is used appropriately.This is why year-end estimates of GDP are more reliable than quarterly estimates.
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Sunday, September 12, 2010
Thursday, September 2, 2010
National Income Accounting/GDP Calculation
GROSS DOMESTIC PRODUCT: The gross domestic product (GDP) is the aggregate monetary value of all goods and services produced in the country during a period of time. The word domestic here assumes special importance as it highlights the fact that only goods & services produced within the confines of the country would be taken into account while calculating the GDP.
CALCULATING GDP: There are 3 ways for calculating a countrys GDP:
1 SUPPLY/PRODUCTION SIDE: The whole economy is divided into distinct water-tight segments-Agri,industry & services. The total value of output of goods and services & the value of inputs of raw materials & services used for production is estimated for each of these. The value added for each sector is arrived at by deducting from the total value of output the value of inputs of raw materials and services is attained.
2 DEMAND/EXPENDITURE SIDE: The income generated at production stage is finally spent on purchase of goods & services or is invested. GDP can, therefore, be also estimated from the expenditure by different segments namely government,private sector and investments. Private final consumption expenditure would include all household expenditure on goods and services except on land and buildings. GFCE would include the amount the government pays to its employees. The remaining part of expenditure would be classified under gross fixed capital formation, which would include various kinds of investments.Adding all three of the expen-ditures would give us a third estimate of GDP.
3 INCOME SIDE: Income generated during the production of goods & services is distributed between two factor inputs,labour & capital. Income is distributed among people who own the capital & those put in their labour.Through this exercise we get a second estimate of GDP.
Difference in the three sets of numbers: The differences arise due to the following reasons. We have a number of taxes/subsidies on various products.This should explain the differnces between the supply and demand estimates of GDP. Various estimation methods are used under different approaches,which also caused discrepancy in data.
Supply side widely followed: The supply side estimation of GDP is taken to be more accurate. The baseline figure for GDP growth put out by the CSO is based on the one derived from the supply/production side. Any revision in the expenditure side of the equation is therefore does not affect the headline. GDP The two sets of numbers helps policymakers/analysts to understand the current position of the industries and the overall demand picture.
CALCULATING GDP: There are 3 ways for calculating a countrys GDP:
1 SUPPLY/PRODUCTION SIDE: The whole economy is divided into distinct water-tight segments-Agri,industry & services. The total value of output of goods and services & the value of inputs of raw materials & services used for production is estimated for each of these. The value added for each sector is arrived at by deducting from the total value of output the value of inputs of raw materials and services is attained.
2 DEMAND/EXPENDITURE SIDE: The income generated at production stage is finally spent on purchase of goods & services or is invested. GDP can, therefore, be also estimated from the expenditure by different segments namely government,private sector and investments. Private final consumption expenditure would include all household expenditure on goods and services except on land and buildings. GFCE would include the amount the government pays to its employees. The remaining part of expenditure would be classified under gross fixed capital formation, which would include various kinds of investments.Adding all three of the expen-ditures would give us a third estimate of GDP.
3 INCOME SIDE: Income generated during the production of goods & services is distributed between two factor inputs,labour & capital. Income is distributed among people who own the capital & those put in their labour.Through this exercise we get a second estimate of GDP.
Difference in the three sets of numbers: The differences arise due to the following reasons. We have a number of taxes/subsidies on various products.This should explain the differnces between the supply and demand estimates of GDP. Various estimation methods are used under different approaches,which also caused discrepancy in data.
Supply side widely followed: The supply side estimation of GDP is taken to be more accurate. The baseline figure for GDP growth put out by the CSO is based on the one derived from the supply/production side. Any revision in the expenditure side of the equation is therefore does not affect the headline. GDP The two sets of numbers helps policymakers/analysts to understand the current position of the industries and the overall demand picture.
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