In the field of economics, the term deflator refers to a coefficient that is used for the development of the deflation procedure. This verb, for its part, refers to the action of converting a nominal monetary value into another that is expressed in a currency that has constant purchasing power.
A deflator, therefore, is used to solve the problem that arises when some economic variables are overestimated. When analyzing the growth of an economy over time, the result can be distorted by rising prices ( inflation ). That is why it is necessary to consider real growth beyond the increase in value.
In this framework, it is essential to rule out the effect of price variations on the economy. This measurement is possible thanks to the use of a deflator that allows the figures to be adjusted.
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Deflators are indices that make it possible to distinguish between prices and quantities. The most common deflator is the one applied to the Gross Domestic Product ( GDP ), also known as the Gross Domestic Product ( GDP ).
The GDP reveals the monetary value reached by the production of services and final demand goods in a region during a certain period of time.
Specifically, we can state that the deflator of the aforementioned Gross Domestic Product, if it is so widely used, is because it is very useful. And that is none other than to make an assessment as accurate as possible of what is the economic growth that has occurred in a country.
Other interesting data about the so-called GDP deflator are the following:
-At no time does it come to measure what the quality of life of a country is.
-Likewise, it must be taken into consideration that it is not used to calculate what the price level is.
-In the same way, it is important to know that this deflator does not come to consider what intermediate consumption goods are. In other words, it does include final production, but not imported goods.
-Among the main advantages that the use of this factor that concerns us brings with it are knowing the changes that occur year after year in what refers to purchasing habits, as well as knowing and valuing the goods and services that come to produce in a particular country.
-In addition to everything indicated, we cannot ignore the fact that it is also considered that using the GDP deflator brings with it its disadvantages. Specifically, the most significant is that it fails to take into account or study what the so-called underground economy is. Likewise, it is considered that calculating it is more laborious than obtaining other important data in the same field.
It is possible to differentiate between nominal GDP (considered with current prices) and real GDP (calculated from constant prices).
The GDP deflator is calculated by dividing nominal GDP by real GDP and then multiplying the resulting figure by 100. The result allows us to know how prices varied in a period.