Introduction

Implicit price deflators: Activities

Implicit price deflators

1 An implicit price deflator is obtained by dividing a current-price value by the corresponding constant-price value and multiplying the result by 100.

Correct. The statement is indeed true.

Incorrect. The statement is true.

2 There are only three implicit deflators, namely GDP deflator, GDE deflator and GNI deflator.

Incorrect. The statement is false.

A deflator can be calculated for any magnitude or variable for which data is available at both current prices and constant prices. For instance, it is possible to calculate a deflator for private consumption spending by households since data for both current and constant values is available.

Correct. The statement is indeed false.

A deflator can be calculated for any magnitude or variable for which data is available at both current prices and constant prices. For instance, it is possible to calculate a deflator for private consumption spending by households since data for both current and constant values is available.

Questions on GDE deflator

3 GDE at constant prices can be obtained by simply deflating GDE at current prices by the CPI.

Incorrect. The statement is false.

GDE at constant prices is a function of a process to convert, using a wide variety of methods and indices, GDE at current prices to GDE at constant prices.

Correct. The statement is indeed false.

GDE at constant prices is a function of a process to convert, using a wide variety of methods and indices, GDE at current prices to GDE at constant prices.

4 The GDE deflator is obtained by dividing the GDE at current prices by GDE at constant prices and can be used to calculate an inflation rate for the country as whole.

Correct. The statement is indeed true.

The percentage change between successive annual values of the GDE deflator indices gives an indication of the inflation rate for the country as a whole.

Incorrect. The statement is true.

The percentage change between successive annual values of the GDE deflator indices gives an indication of the inflation rate for the country as a whole.

5 If the GDE deflator for 2000 is 196,0 and the GDE deflator for 2001 is 215,6, it implies an inflation rate of 10% for 2001.

Correct. The statement is indeed true.

The calculation is as follows:

$$
\Biggl[
\Biggl(
\frac{215,6}{196,0}
\Biggl) -1
\Biggl]
\times 100
$$

= (1,1 -1) x 100 =
= 0,1 x 100
= 10%

Incorrect. The statement is true.

The calculation is as follows:

$$
\Biggl[
\Biggl(
\frac{215,6}{196,0}
\Biggl) -1
\Biggl]
\times 100
$$

= (1,1 -1) x 100 =
= 0,1 x 100
= 10%

6 In the base year the GDE inflator index is equal to 100.

Correct. The statement is indeed true.

In the base year the GDE at current prices is equal to GDE at constant prices, which gives an index of 100.

Incorrect. The statement is true.

In the base year the GDE at current prices is equal to GDE at constant prices, which gives an index of 100.

Questions 7 to 11 are based on the following table. Assume the base year is 2012.

Year GDE at current prices GDE at constant prices GDE deflator % change in GDE deflator (one decimal point)
2011 29 600 30 200 c
2012 30 600 a b d
2013 32 940 31 200 105.6 e

7 The value for a is …

Correct. In the base year the GDE at nominal prices is equal to the GDE at constant prices = 30 600.

Incorrect. In the base year the GDE at nominal prices is equal to the GDE at constant prices = 30 600.

8 The value for b is …

Correct. The GDE deflator is 100.

In the base year the GDE at nominal prices is equal to the GDE at constant prices. The GDE deflator index is therefore

$$
\Biggl(
\frac{30 600}{30 600}
\Biggl)
\times 100
$$

= 100

Incorrect. The GDE deflator is 100.

In the base year the GDE at nominal prices is equal to the GDE at constant prices. The GDE deflator index is therefore

$$
\Biggl(
\frac{30 600}{30 600}
\Biggl)
\times 100
$$

= 100

9 The value for c is …

Correct. The GDE deflator index for 2011 is 98.

The calculation is as follows:

$$
\Biggl(
\frac{\text{29 600}}{\text{30 200}}
\Biggl)
\times 100
$$

= 98

Incorrect. The GDE deflator index for 2011 is 98.

The calculation is as follows:

$$
\Biggl(
\frac{\text{29 600}}{\text{30 200}}
\Biggl)
\times 100
$$

= 98

10 The value for d is …

%

Correct. The % change in GDE deflator is 2%.

It is calculated as follows:

$$
\Biggl[
\Biggl(
\frac{100}{98}
\Biggl) -1
\Biggl]
\times 100
$$

= (1,02 -1) x 100
= 2%

Incorrect. The % change in GDE deflator is 2%.

It is calculated as follows:

$$
\Biggl[
\Biggl(
\frac{100}{98}
\Biggl) -1
\Biggl]
\times 100
$$

= (1,02 -1) x 100
= 2%

11 The value for e is …

%

Correct. The % change in GDE deflator is 5,6%.

It is calculated as follows:

$$
\Biggl[
\Biggl(
\frac{105,6}{100,0}
\Biggl) -1
\Biggl]
\times 100
$$

= (1,055 -1) x 100
= 5,6%

Incorrect. The % change in GDE deflator is 5,6%.

It is calculated as follows:

$$
\Biggl[
\Biggl(
\frac{105,6}{100,0}
\Biggl) -1
\Biggl]
\times 100
$$

= (1,055 -1) x 100
= 5,6%

12 An increase in import prices will increase the GDE deflator.

Correct. The statement is indeed true.

GDE includes imports and an increase in import prices will increase the GDE deflator.

Incorrect. The statement is true.

GDE includes imports and an increase in import prices will increase the GDE deflator.

GDP deflator

13 The GDP deflator is obtained by dividing the GDP at current prices by GDP at constant prices and can be used to calculate an inflation rate for the country as a whole.

Correct. The statement is indeed true.

The percentage change between successive annual values of the GDP deflator indices gives an indication of the inflation rate for the country as a whole.

Incorrect. The statement is true.

The percentage change between successive annual values of the GDP deflator indices gives an indication of the inflation rate for the country as a whole.

14 The fact that GDP includes exports and excludes imports means that the GDP deflator is not an ideal basis for calculating an inflation rate, particularly when export prices and import prices increase at different rates (i.e. when the terms of trade change).

Correct. The statement is true.

Incorrect. The statement is true.

15 An increase in import prices will cause the GDP deflator to rise.

Incorrect. The statement is false.

GDP excludes imports, and import prices are therefore not included in the GDP deflator.

Correct. The statement is indeed false.

GDP excludes imports, and import prices are therefore not included in the GDP deflator.

16 When the prices of imported capital and intermediate goods increase, ceteris paribus, changes in the GDP deflator tend to understate inflation in the domestic economy.

Correct. The statement is indeed true.

GDP excludes imports, and import prices are therefore not included in the GDP deflator. This increase in prices of imported capital and intermediate goods is therefore not captured and the GDP deflator understates inflation in the domestic economy.

Incorrect. The statement is true.

GDP excludes imports, and import prices are therefore not included in the GDP deflator. This increase in prices of imported capital and intermediate goods is therefore not captured and the GDP deflator understates inflation in the domestic economy.

17 When import prices and export prices are increasing at the same rate, the GDP deflator will overstate inflation in the domestic economy.

Incorrect. The statement is false.

As long as export prices and import prices increase at the same rate, then the problem of overstating or understating the inflation rate for the economy is not a serious one.

Correct. The statement is indeed false.

As long as export prices and import prices increase at the same rate, then the problem of overstating or understating the inflation rate for the economy is not a serious one.

GNI deflator

18 The GNI deflator is obtained by dividing the GNI at current prices by GNI at constant prices and can be used to calculate an inflation rate for the country as a whole.

Correct. The statement is indeed true.

The percentage change between successive annual values of the GNI deflator indices gives an indication of the inflation rate for the country as a whole.

Incorrect. The statement is true.

The percentage change between successive annual values of the GNI deflator indices gives an indication of the inflation rate for the country as a whole.

19 Since GNI does not include imports, it also tends to understate or overstate the inflation for the country as a whole.

Incorrect. The statement is false.

In the case of GNI, adjustments are made for the terms of trade.

Correct. The statement is indeed false.

In the case of GNI, adjustments are made for the terms of trade.

20 The GDE deflator and the GNI deflator are generally better bases for calculating an overall inflation rate than the GDP deflator.

Correct. The statement is indeed true.

The reason is that GDP does not include imports.

Incorrect. The statement is true.

The reason is that GDP does not include imports.

Advantages and disadvantages of implicit price deflators

21 GDP, GDE and GNI deflators are based on a limited basket of consumer goods and services.

Incorrect. The statement is false.

GDP, GDE and GNI deflators provide more comprehensive coverage than the CPI, which is based on a limited basket of consumer goods and services.

Correct. The statement is indeed false.

GDP, GDE and GNI deflators provide more comprehensive coverage than the CPI, which is based on a limited basket of consumer goods and services.

22 Implicit price deflators are based on current weights, whereas the CPI is based on fixed weights.

Correct. The statement is indeed true.

Implicit price deflators such as GDE, GDP and GNI are based on current weights, whereas the CPI is based on fixed weights.

Incorrect. The statement is true.

Implicit price deflators such as GDE, GDP and GNI are based on current weights, whereas the CPI is based on fixed weights.

Comparison between different measures of inflation

23 Complete the following table by using the Online Statistical Query tool of the SARB to calculate the inflation rates according to the CPI, GDP, GDE and GNI deflators for the years 2017 to 2019.

Online Statistical Query tool

CPI index for all urban areas (KBA7071J)

GDP at current prices (KBA6006J)

GDP at constant prices (KBA6006Y)

GDE at current prices (KBA6012J)

GDE at constant prices (KBA6012Y)

GNI at current prices (KBA6016J)

GNI at constant prices (KBA6016Y)

Year % change in CPI % change in GDP deflator % change in GDE deflator % change in GNI deflator
2017
2018
2019
Click to Show Answer

From the data you get the indices:

Year CPI Index GDP deflator index GDE deflator index GNI deflator index
2016 97,8 141,691 140,211 140,185
2017 103,0 149,154 145,755 145,856
2018 107,8 154,996 152,577 152,738
2019 112,2 161,228 157,541 157,659

From this information you calculate the % change in the indices:

Year % change in CPI index % change in GDP deflator % change in GDE deflator % change in GNI deflator
2017 5,3 5,3 4,0 4,0
2018 4,7 3,9 4,7 4,7
2019 4,1 4,0 3,3 3,2

24 There are significant differences in the rates of inflation calculated on the basis of the various explicit price index and implicit price deflators in both the long run and the short run.

Incorrect. The statement is false.

The differences are not usually very large and they cancel out over time. Economists usually consider all these indices when analysing the inflation process.

Correct. The statement is indeed false.

The differences are not usually very large and they cancel out over time. Economists usually consider all these indices when analysing the inflation process.