Question 8:Define Gross Domestic Product (GDP) deflator and discuss its importance.
The correct answer is -The Gross Domestic Product (GDP) deflator is an economic indicator that measures the change in the price level of all goods and services produced within a country. It is essentially a measure of inflation, representing the ratio of the nominal GDP to the real GDP, where the nominal GDP is the current value of all goods and services produced in an economy, while the real GDP is adjusted for changes in prices over time.
The formula for calculating the GDP deflator is as follows:
GDP Deflator = (Nominal GDP / Real GDP) x 100
The GDP deflator is important for several reasons:
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Inflation measurement: The GDP deflator is an important tool for measuring inflation in an economy. By tracking the changes in the price level of all goods and services produced, it provides an accurate measure of how much more or less it costs to purchase the same basket of goods over time. This information is critical for policymakers, businesses, and individuals in making decisions related to their economic activities.
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Economic analysis: The GDP deflator is also used to analyze economic trends and performance. By tracking changes in the GDP deflator, economists can identify periods of inflation or deflation and assess the impact of economic policies and events on the overall economy.
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International comparison: The GDP deflator is also useful for comparing the economic performance of different countries. By adjusting the nominal GDP for changes in price levels, the GDP deflator provides a more accurate basis for comparing the economic output of different countries.
