How is the GDP deflator of an economy calculated? What is the value of the GDP deflator in an economy in which nominal GDP is 5 percent larger than real GDP?
In an economy, the GDP deflator = (Nominal GDP / Real GDP) × 100
If the nominal GDP of an economy is 5 percent larger than its real GDP, then the value of the GDP deflator can be calculated as follows:
Let the value of the real GDP of the economy be X.
As the value of nominal GDP is 5 percent larger than real GDP,
Nominal GDP = X + (5X / 100) = 105X / 100 = 1.05X.
The formula to calculate the GDP deflator is as follows:
GDP Deflator = (Nominal GDP / Real GDP) × 100 = (1.05X / X) × 100 = 105
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