GDP measures demand for final goods and services in a country, while nominal GDP reflects current prices. The GDP deflator adjusts nominal GDP for inflation and is influenced by changes in consumer demand. Real and nominal GDP must be calculated before applying the GDP deflator, and only final products are considered. The GDP deflator is measured using a basket of goods and can be affected by both production and demand.
Gross domestic product (GDP) refers to the total or combined demand for final goods and services in a country within a given period. Nominal GDP refers to the current prices of goods in a country at a given point in time. It offers a glimpse of what prices are just at the time under consideration. The GDP deflator shows how nominal GDP differs from real GDP after adjustments to the nominal GDP result in response to inflation. It is affected by changes in consumer demand patterns.
Before the GDP deflator can be applied, real GDP and nominal GDP values must be calculated to have a basis for comparison and subtraction. The process of calculating a nation’s real and nominal GDP, with a view to arriving at the GDP deflator, involves assessing the effects of demand and supply. Furthermore, the only products under consideration are the final products and not the raw materials, as counting both could result in the same item being counted repeatedly. For example, GDP does not count cocoa as much as chocolate made from it, as the result would be misleading. Cocoa is the raw material used to make chocolate and will only be considered if it has not been used to produce chocolate until the end of a commercial cycle.
Real GDP is obtained by calculating the total demand for goods per consumer over a business cycle, which may be quarterly, relative to the multi-cycle median calculation. Nominal GDP is only concerned with calculations of the same consumer demand at the moment, making it always higher than GDP. The GDP deflator is used to calculate accurate prices, taking price differences into account. This number is derived from the GDP deflator and can change as consumer demand increases in response to various factors.
The GDP deflator is usually measured in terms of a basket of goods in which the price of the goods in the basket is measured over time. It can be influenced by a lot of production, which does not measure demand and causes prices to fall. It can also be affected by too much demand, which will drive commodity prices into a higher-than-normal range.
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