Macroeconomic Insights: GDP Deflator’s Impact on Economic Distribution

There are various macroeconomic identities and concepts related to national income measurement, including Gross National Product (GNP), Net National Product (NNP), National Income (NI), Personal Income (PI), and Personal Disposable Income (PDI). 

These identities help in understanding how income is distributed within an economy and how it is affected by various factors like depreciation, taxes, subsidies, and transfers.

Macroeconomic Concepts: Deciphering National Income Trends

• Gross National Product (GNP): GNP represents the total economic output produced within a country, including income earned by domestic factors of production abroad minus income earned by foreign factors of production within the country.

• It is calculated as GDP plus net factor income from abroad.

GNP = GDP + Net Factor Income from Abroad

• Net National Product (NNP): NNP is obtained by subtracting depreciation (wear and tear of capital) from GNP. 

• Depreciation does not contribute to anyone’s income, so it is deducted to obtain a more accurate measure of income.

NNP = GNP – Depreciation

• National Income (NI): NI is NNP evaluated at market prices, taking into account indirect taxes and subsidies.
  • It represents the income that accrues to factors of production within the country.

NI = NNP at Market Prices – Net Indirect Taxes (Indirect Taxes – Subsidies)

Personal Income (PI): PI is the income received by households from NI.

•  It is calculated by deducting undistributed profits, corporate tax, and net interest payments made by households, and adding transfer payments received from the government and firms.
• Undistributed Profits (UP): NI, which is earned by the firms and government enterprises, a part of profit is not distributed among the factors of production. 
• Transfer Payments: The households receive transfer payments from the government and firms (pensions, scholarships, prizes, for example) which have to be added to calculate the Personal Income of the households.

Personal Disposable Income (PDI): PDI is the income available to households after deducting personal tax payments (such as income tax) and non-tax payments (like fines) from PI. 

• It represents the income that households have at their disposal for consumption or savings.

PDI = PI – Personal Tax Payments – Non-Tax Payments

Diagrammatic representation of the relations between these major macroeconomic variables

Evaluating Economic Growth: Nominal vs. Real GDP Insight

Nominal GDP: Real-world Impact on Prices

• Meaning: It is the total value of goods and services produced in an economy at current market prices.
  • It does not account for changes in prices over time.
• Example: Suppose a country only produces bread. In the year 2000 it had produced 100 units of bread, price was Rs 10 per bread. 
  • GDP at current price was Rs 1,000.
  • In 2001 the same country produced 110 units of bread at price Rs 15 per bread. 
  • Therefore nominal GDP in 2001 was Rs 1,650 (=110 × Rs 15). 
  • Real GDP in 2001 calculated at the price of the year 2000 (2000 will be called the base year) will be 110 × Rs 10 = Rs 1,100.

Real GDP: Assessing Economic Growth Beyond Prices

• Meaning: Real GDP is a measure of economic output that adjusts for changes in prices.
  • It evaluates goods and services at constant (base-year) prices, allowing for a comparison of production volumes across different years. 
• Role of Real GDP: It helps eliminate the impact of price changes, making it a useful tool for assessing actual changes in economic production.

                              Real GDP = (Nominal GDP / GDP Deflator) * 100

GDP Deflator: Tracking Economic Price Shifts

• The GDP Deflator Index: Analyzing Economic Price Trends
  • GDP Deflator is an index that measures the average change in prices of all goods and services included in GDP over time. 
  • GDP Deflator is calculated as the ratio of nominal GDP to real GDP, expressed as a percentage.

GDP Deflator = (Nominal GDP / Real GDP) * 100

• A GDP deflator of 150% implies that prices have increased by 50% compared to the base year.

Consumer Price Index (CPI): Tracking Consumer Inflation Trends

• It measures changes in the prices of a fixed basket of goods and services typically purchased by a representative consumer.
• It quantifies the inflation experienced by consumers. 
• CPI is expressed as a percentage change in prices from a base year (Currently 2012)

               CPI = (Cost of Basket in Current Year /   Cost of Basket in Base Year) * 100

Wholesale Price Index (WPI): Analyzing  Wholesale Price Shifts in Production

• It is an index that tracks changes in the prices of goods at the wholesale level (Current Base year: 2011-12)
• It is used to assess inflation in the early stages of production and distribution.
• In some countries, it may be referred to as the Producer Price Index (PPI).

Difference between CPI and GDP Deflator: Contrasting Measures of Price Change