Cumulative inflation with GDP Deflator
When working with GDP Deflator, we can calculate the cumulative inflation on consumed and produced goods in a market with the following equation:
Cumulative inflation % = GDP Deflator - 100
Cumulative inflation with GDP Deflator represents the total increase in price of consumer and producer goods due to inflation!
Given the following scenario...
Scenario: A country produces only X and Y; their outputs last year and this year are given in the table below. Calculate the GDP deflator.
| Base Year | This Year | |
|---|---|---|
| Output of X | 100 | 120 |
| Output of Y | 40 | 80 |
| Px | $20 | $30 |
| Py | $15 | $20 |
...we could calculate a GDP Deflator of 144.4.
GDP Deflator = (Nominal GDP / Real GDP) * 100
GDP Deflator = ($5200 / $3600) * 100
GDP Deflator = ($5200 / $3600) * 100
GDP Deflator = (1.444) * 100
GDP Deflator = 144.4
From here, we can plug this into our cumulative inflation % formula...
Cumulative inflation % = GDP Deflator - 100
Cumulative inflation % = 144.4 - 100
...resulting in a cumulative inflation % of 44.4%!
Cumulative inflation % = GDP Deflator - 100
Cumulative inflation % = 144.4 - 100
Cumulative inflation % = 44.4
This shows us that since the base year, the prices of Px and Py have increased by 44.4% due to inflation!