If real GDP is less than nominal GDP in gvn year, value of GDP deflator must be lower than the base year ? ?

Question

the question is true or false and Why ? ?

when i applied the formula which is

Deflator = Nominal GDP/Real GDP

i found that the deflator will be higher if real is less than nominal,, but is that enough to answer ? ? i mean through mathematical evidence ? ? !!!

Answer 1

Your formula is correct: Deflator = Nominal GDP/Real GDP

Let us use Symbols: Dt= Ynt / Yrt where Dt is GHDP price deflator for year t, Ynt is the nominal GDP in yeart and Yrt is the real GDP in year t.

For the base year, GDP Deflator is always equal to 1.

If in year t, Yrt < Ynt as the question says, it follows that

Ynt > Yrt

and dividing both sides by Yrt, we get (Ynt/Yrt)>Yrt/Yrt=1,

or, Dt=(Ynt/Yrt)>1.

So, you are correct that the GDP deflator in the given year in which real GDP is less than nominal GDP, is higher than the base year GDP deflator of 1.

So, the question makes a statem,ent which is False. If the real GDP is less than the Nominal GDP, it means that the prices have risen as compared with any base year.

Note: In most systems of national accounts the GDP deflator measures the difference between the real (or chain volume measure) GDP and the nominal (or current price) GDP. The formula used to calculate the deflator is:

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

Dividing the nominal GDP by the GDP deflator and multiplying it by 100 would then give the figure for real GDP, hence deflating the nominal GDP into a real measure.

It is often useful to consider implicit price deflators for certain subcategories of GDP, such as computer hardware. In this case, it is useful to think of the price deflator as the ratio of the current-year price of a good to its price in some base year. The price in the base year is normalized to 100. For example, for computer hardware, we could define a "unit" to be a computer with a specific level of processing power, memory, hard drive space and so on. A price deflator of 200 means that the current-year price of this computing power is twice its base-year price - price inflation. A price deflator of 50 means that the current-year price is half the base year price - price deflation.