What is deflator?

What Does deflator Mean

In the field of economics , the term deflator refers to a coefficient that is used to develop the deflation procedure . This verb, for its part, refers to the action of converting a nominal monetary value into another that is expressed in a currency that has constant purchasing power .

A deflator, therefore, is used to solve the problem that arises when some economic variables are overestimated. When analyzing the growth of an economy over time, the result can be distorted by rising prices ( inflation ). That is why it is necessary to consider real growth beyond the increase in value.

In this framework, it is essential to rule out the effect of price variations on the economy. This measure is possible thanks to the use of a deflator that allows the figures to be adjusted.
Deflators are indices that allow a distinction between prices and quantities. The most common deflator is the one applied to Gross Domestic Product ( GDP ), also known as Gross Domestic Product ( GDP ).
The GDP reveals the monetary value reached by the production of services and goods in final demand in a region during a certain time period.
Specifically, we can state that the deflator of the mentioned Gross Domestic Product if it is so widely used is because it is very useful. And that is none other than making an assessment as accurate as possible of what the economic growth that has occurred in a country is.
Other data of interest about the so-called GDP deflator are the following:

- At no time does it come to measure what the quality of life of a country is.

-Also, it must be taken into consideration that it is not used to calculate what the price level is.

-In the same way, it is relevant to know that this deflator does not come to consider what intermediate consumer goods are. In other words, it does include what the final production is, but not what the imported goods are.

-Among the main advantages that the use of this factor that concerns us brings with it are both knowing the changes that occur year after year in what refers to purchasing habits and knowing and evaluating the goods and services that come to us. produce in a specific country.

-In addition to everything indicated, we cannot ignore that it is also considered that using the GDP deflator brings its disadvantages. Specifically, the most significant is that it does not take into account or study what is the so-called underground economy. It is also considered that calculating it is more laborious than obtaining other important data in the same field.
It is possible to differentiate between nominal GDP (considered with current prices) and real GDP (calculated from constant prices).

The GDP deflator is calculated by dividing nominal GDP by real GDP and then multiplying the obtained figure by 100 . The result allows to know how prices varied in a period.

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