๐ Topic Summary
The GDP deflator is a measure of price inflation with respect to a specific base year. It's the ratio of nominal GDP (GDP evaluated at current market prices) to real GDP (GDP adjusted for inflation). It helps us understand how much of the change in nominal GDP is due to changes in prices rather than changes in the quantity of goods and services produced. A higher GDP deflator indicates a higher level of inflation in the economy.
๐งฎ Part A: Vocabulary
Match the following terms with their definitions:
| Term |
Definition |
| 1. Nominal GDP |
A. GDP adjusted for inflation. |
| 2. Real GDP |
B. The increase in the average level of prices in an economy. |
| 3. Inflation |
C. GDP evaluated at current market prices. |
| 4. Base Year |
D. A price index that measures the level of prices of all new, domestically produced, final goods and services in an economy. |
| 5. GDP Deflator |
E. The year used for comparison in the calculation of an index. |
(Answers: 1-C, 2-A, 3-B, 4-E, 5-D)
๐ Part B: Fill in the Blanks
The GDP deflator is calculated as the ratio of __________ GDP to __________ GDP, multiplied by 100. It is a measure of __________ in an economy. A higher GDP deflator suggests a(n) __________ level of inflation.
(Answers: Nominal, Real, Inflation, Higher)
๐ค Part C: Critical Thinking
Explain how the GDP deflator can be used to differentiate between real economic growth and purely inflationary increases in GDP. Provide an example.