Using GDP to determine inflation can lead to a confusing analysis. Most who are not familiar with the calculation do not realize that the GDP, or gross domestic product, only considers products sold from a country and not the value of imports. Calculating GDP involves finding both the real GDP and the nominal GDP.
How to Calculate GDP Inflation
Make the following assumptions for the calculations: a hypothetical country named Floral makes flowers. Production in year one: 2000 flowers sold for $2 each. Production in year two: 2300 flowers sold for $2.10 each.
Calculate the nominal GDP for each year. Year 1 = 2000 $2 = $4000. Year 2 = 2300 $2.10 = $4830.
Calculate the real GDP for each year. This is simply the total number of goods sold. Year 1 = 2000. Year 2 = 2300.
Calculate the nominal GDP growth from year 1 to year 2. In the example: ($4830/$4000 -1)100= 20.75%.
Calculate the real GDP growth from year 1 to year 2. In the example: (2300/2000 - 1)100 = 15%.
Find the change between nominal and real GDP to get the GDP deflator. In the example: 20.75% - 15% = 5.75%. This is the GDP inflation.