How To Calculate the Inflation Rate from GDP

Inflation is either the increase of price level or money supply. This is one of the determinants whether a country's economy is growing or not. Inflation is commonly measured using the Consumer Price Index, or CPI. This is the standard measurement in the U.S. financial inflation. But besides CPI, inflation can also be measured through the changes in the gross domestic product, or the GDP deflator, to be more specific. Calculating the inflation rate from GDP is easier than you might think. It can be as easy as entering data in an online calculator. But for the sake of explaining it further, try calculating the inflation rate the traditional way. Follow the steps below to guide you through the calculation:

  • Get data. The inflation rate is computed using the values of GDP nominal and GDP real. The GDP nominal is the monetary value of GDP. It is sometimes called as the GDP current or GDP historical. You'll know it is the nominal GDP if the data is in currency like $100. Meanwhile, the GDP real or raw GDP is the number of goods produced by the country in a given year. It is the plain numerical value of GDP. You know it is the raw or real GDP if the number is just plain numbers like 200, 78, or 8978. What will be the years for comparison? The nominal and real GDPs during those years should be obtained. For the sake of this exercise, use the following data: In 2007, the country produced 3 units of goods that were sold at $4 each. In 2008, the country produced 6 units of goods that were sold at $3 each. To obtain the nominal GDP, multiply the number of units by the price. Therefore, 2007 nominal GDP = 3 X $4 = $12 and 2008 nominal GDP = 6 X $3 = $18. For the real GDP, simply get the number of units produced and sold, which are 3 and 6, respectively.
  • Get the percentage change of the nominal and real GDP. Follow this formula to get the percentage rate: N = (x/y-1)100%.

Below are the computations using the data above. Note: "x" represents data of 2008 and "y" represents data of 2007.

Nominal GDP:

N = (x/y-1)100%

    = ($18/$12-1)100%

    = (1.5-1)100%

    = (0.5)100%

    = 50%

Therefore, the nominal GDP percentage change from 2007 to 2008 is 50%.

Real GDP:

N = (6/3-1)100%

    = (2-1) 100%

    = (1) 100%

    = 100%

Therefore, the real GDP percentage change from 2007 to 2008 is 100%.

  • Compute for the inflation rate using the GDP percentages. Use this formula for the calculation: N = x-y, where "x" represents the real GDP and "y" represents the nominal GDP.

N = x-y

    = 100% - 50%

    = 50%

Therefore, with the given data above, the inflation rate of the country is 50% from 2007 to 2008.

After calculating the inflation rate, you don't just leave the figures alone. That 50% means something and it's more than just being a percentage number. Use the data you will obtain to assess the current situation of your country. For some, doing so is just a mental exercise and maybe a way to practice reasoning. But for investors, this data helps them decide whether they'll continue investing in one country or not.


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