Price-Level Changes
Price Indexes
The Implicit Price Deflator
Values for nominal and real GDP, described earlier in this chapter, provide us with the information to calculate the most broad-based price index available. The implicit price deflator, a price index for all final goods and services produced, is the ratio of nominal GDP to real GDP.
Implicit price deflator = nominal GDP / real GDP
In computing the implicit price deflator for a particular period, economists define the market basket quite simply: it includes all the final goods and services produced during that period. The nominal GDP gives the current cost of that basket; the real GDP adjusts the nominal GDP for changes in prices. The implicit price deflator is thus given by
Equation 5.3
Implicit price deflator = nominal GDP / real GDP
For example, in 2011, nominal GDP in the United States was $15,094.5 billion, and real GDP was $13,315.3 billion. Thus, the implicit price deflator was 1.134. Following the convention of multiplying price indexes by 100, the published number for the implicit price deflator was 113.4.
In our analysis of the determination of output and the price level in subsequent chapters, we will use the implicit price deflator as the measure of the price level in the economy.