Macroeconomic Theory And Policy

Ques 1)

GDP Deflator is an economic metric which is used to adjust the Gross Domestic Product of an economy
for changes in prices of goods and services. It is necessary to adjust the GDP values for prices in order to
compare GDP data for different periods of time. Mathematically,

Real GDP = Nominal GDP x 100

Deflator

Now for the year 2007-08 to 2008-09,

Rate of change of Nominal GDP = (788-742)/742 = 6.19%
Rate of change of Real GDP = (623-602)/602 = 3.49%

Therefore the Nominal Growth Rate for GDP is 6.2% whereas the Real Growth Rate is only 3.5%. This
discrepancy of around 2.7% is explained by the change in the GDP deflator value for the two periods
(123.3 for 2007-08, 126.6 for 2008-09). Change in the value indicates change in the rate of inflation over
the two periods. Since inflation is increasing, the growth of Nominal GDP is neutralized by rising prices
and the real growth achieved is less than nominal growth. Thus we can conclude that growth is being
eroded by rising inflation in the economy.

Ques 2)

To determine rate of inflation from GDP Deflator we can use the following formula :

For 2003-04 , Inflation = (111.0-106.4)/106.4 = 0.043 = 4.3%

For 2008-09 , Inflation = (126.6-123.3)/123.3 = 0.027 = 2.7%

This shows that the rate of inflation has decreased from 2003-04 to 2008-09.

Ques 3)

Using the expenditure method of determining GDP

GDP = Consumption + Investment + Govt Spending + (Exports – Imports)

-savings ~ investment.

Ques 2)