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2. Background InformationThe following pages are designed to provide more background detail about the GDP deflator, as well as providing some answers to basic questions.
What is GDP? Gross Domestic Product (GDP) is a measure of the total domestic economic
activity. It is the sum of all incomes earned by the production of
goods and services on UK economic territory, wherever the earner of
the income may reside. GDP is equivalent to the value added to the
economy by this activity. Value added can be defined as income less
intermediate costs. Therefore growth in GDP reflects both growth in
the economy and price changes (inflation). Theoretical Approaches to Measuring GDP There are 3 measures of GDP.
The sum of gross value added by those who produce goods and services
plus taxes and less any subsides on products gives GDP.
The sum of the uses of value added gives GDP. By measuring the distribution
of this value added through wages, other compensation to employees,
taxes on production, as well as imports less subsides and gross operating
surplus (profit) gives GDP.
Final consumption by households, government and industry reflects the value added at all stages in the creation of goods and services, (actual final consumption and gross capital formation). Summing together all the final expenditure in the economy, add in the value of exports and subtract expenditure on imports, gives GDP. These three measures should, in reality, be equal as they are measuring
the same flows of money. However in practice all three measures are
complicated to measure and so may vary. The Office for National Statistics
(ONS) produces a single series by 'balancing' the three measures.
GDP figures are released quarterly along with other National Accounts
data and are available from the ONS or in it's publications such as
Economic Trends and the Blue Book. Current and Constant Price GDP GDP, like many of the National Accounts aggregates, can be expressed
in terms of either current or constant prices.
The ratio of the current and constant price series is therefore a
measure of price movements, and this forms the basis for the GDP deflator.
The base year and the reference year ONS currently uses 1995 as a base year for GDP (ie
GDP at constant prices). This means that the individual components
of GDP that are aggregated together are done so using the prices relating
to 1995. It is often helpful to change the reference
year so that another point is referenced as 100. For the
purposes of the GDP deflator series prices are shown relating to the
last full financial year. For further information on the reference
year and index numbers see Annex A: Practical examples, Changing the
reference year. The GDP deflator and other measures of inflation The most widely known other measure of inflation is the Retail Prices Index (RPI). The RPI is defined as a measure of change in the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. RPIX is a similar measure but excludes the cost of mortgage interest payments. The GDP deflator is a measure of the movement in prices of UK inputs into the economy, (especially of wages and profits), whereas the RPI relates more specifically to price movements of goods and services purchased for consumption by households. Therefore the coverage of the GDP deflator is wider than that of the RPI, and it is this which makes the GDP deflator more appropriate for use when deflating public expenditure series. The RPI, RPIX and the GDP deflator tend to move broadly together
over a period of time but they can diverge in the short term. Classification of the GDP deflator set The GDP deflators are based on published figures and are therefore
unclassified. This means that the series may be used
and quoted, for example when negotiating contracts. Return to Table of Contents Last Updated June 22, 1999 by Russell Coleman |
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