Price Risk

And finance Allah shmoop What is implicit GDP price deflator

Okay people there are price deflator is like you know

things that would bring down something's price Think two day

old sushi or Christmas ornaments on sale December twenty sixth

for a prize show dog that suddenly loses all its

air Well that's not kind of price deflator we have

in mind here The GDP price deflator is a measure

of prices for goods and services produced within a country

for a period of time It's a way to basically

track inflation in that country Snow Haven is a tiny

country located to the north of Greenland The nation boasts

one hundred twenty residents total each of whom makes a

living from the production and export of ice sculptures You're

a Nikon Ph D student working on a thesis Your

roommate threw a party the day before you were scheduled

to declare your thesis topic You don't remember much but

somehow you ended up with a thesis topic centered on

the economy of snow haven Will you start your research

first step Calculate how big snow havens economy is Alright

that's pretty simple To measure economic output Used GDP gross

domestic product A broad measure of economic production right You

know what that is You calculate that figure by adding

up the value of all the goods and services produced

by an economy during a period of time Well in

snow havens case where everyone just makes ice sculptures you're

dealing only with the value of all the ice sculptures

they make In a more complex economy Like while the

U S You're dealing with a whole lot more things

right So all the value of ski news and juicers

and Oreos that get made in a year as well

is the value of all the yoga classes and foot

massages they get done Yet all gets added up will

notice that the word value keeps coming up here You

don't count the number of goods made or the number

of services rendered You count the value of those goods

and services like the dollar value of them If you

just counted the number of goods like the volume well

then making a bar of soap might count the same

as making a passenger jet right one for one it

doesn't quite work The soap is one thing The jets

another but obviously more goes into making the jet and

a bunch More people have to work a lot more

to get that jet made so it should count a

lot more to GDP right has more value than a

bar So so to give everything the proper waiting in

the GDP figure the currency value of the stuff gets

all out of together The soap contributes Ah fifty cents

of GDP and the jet contributes an thirty eight million

But there's an issue that comes up with this method

GDP gets impacted by price changes meaning inflation gets counted

as growth prices rise GDP rise is whether or not

actual output goes up We have to adjust for that

So this year the people of Snow Haven made twenty

thousand ice sculptures which sold for an average price of

a thousand bucks each The math Well that's a thousand

times twenty thousand or twenty million dollars GDP for the

year for Snow Haven Yep twenty meg and next year

they also make twenty thousand sculptures But there's a wave

of high class art Gallas in Monaco that you know

needs ice sculptures so that drives the prices higher Average

price rises to a thousand one hundred dollars each while

we plug that into the GDP equation and that totals

of GDP of twenty two million dollars That's ten percent

GDP growth Massive But all that growth was just from

inflation And yes it could be pricing power of the

supplier Ah got higher because they're ice sculptures were more

in demand and more highly prized But that's not where

this question's going We're going to say it's on ly

by inflation that you know prices went up on that

was kind of it So ideal is an economist You

want to be able to tell how much changing prices

contribute to the GDP growth That way you can get

an accurate picture of what's going on in the economy

without inflation mucking up the whole situation So for that

reason there are actually two GDP measures There's nominal GDP

I even number We just figured out the name of

the GDP the name of that number It's the raw

number that includes the price changes And then there's really

GDP It's an adjusted number where the impact of price

changes get well soon tricked out Here's where the implicit

GDP price deflator comes in Then it represents the ratio

between nominal GDP and riel GDP It shows the impact

that inflation had on GDP that year so Snow Haven

has nominal GDP of twenty two million bucks for the

year But two million of that came from price changes

so the country's riel GDP was twenty million nominal GDP

over real GDP twenty two million over twenty million The

implicit GDP price deflator for the year then yes one

point one a number above one on the deflator figure

means prices went up during the period We're going to

divide by that number and bring him down to the

real number In other words there was inflation the higher

the number while the higher the rate of inflation Yeah

a number below one means that real GDP was higher

than nominal GDP indicating a drop in general prices like

deflation Like when you're suddenly evolved Former prize show dog

also developed a painful infectious skin disease and starts to

show early signs of rabies Yeah run for the hills 00:05:01.37 --> [endTime] people Yeah