How to Calculate the Inflation Rate From GDP
Inflation is a measure of an increase in the cost of goods over time. There are two basic methods for calculating inflation. The first and most common is using the consumer price index (CPI). Another method for calculating inflation is to use the gross domestic product (GDP) deflator, which specifically measures the value of products produced. If you don't know how inflation is being calculated, you won't understand the number.
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Instructions
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Assume the following: Country Utopia sold 5 rocks for $1 each in year 1; it sold 7 rocks for $1 each in year 2; it sold 7 rocks at $2 each in year 3. This is the only product in this country, and GDP does not consider imports.
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2
Determine the country in question and obtain the nominal GDP for each year. This is the dollar value for all goods produced: Price * Quantity. Thus, in our example, year 1 = $5; year 2 = $7; year 3 = $14.
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3
Determine the real GDP for each year. This is the number of units sold. Thus, in our example, year 1 = 5; year 2 = 7; year 3 = 7.
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4
Calculate the percentage change in nominal GDP. As with our example, year 2 divided by year 1 subtracting the 1 and converting it into a percentage: (7/5 -1)100 = 40%; Year 2: (7/7 -1)100 = 0%.
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5
Calculate the percentage change in real GDP using the same formula but using the values from Step 3. In our example, year 2 growth from year 1: ($7/$5 - 1)100 = 40%; Year 3 growth from Year 2: ($14/$7 -1)100 = 100%.
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6
Compute the change in nominal GDP from real GDP, which is the GDP deflator. As in our example, year 2 showed a 0% change while year 3 was 100%. This is the inflation rate for each year.
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7
Compare the first year to the last year. In our example, year 3 to year 1 is ($14/$5 - 1)100 = 180% nominal GDP. The real GDP is (7/5 - 1)100 = 40%. The GDP deflator inflation rate is 140%.
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Tips & Warnings
For actual GDP information on the United States, go to the Bureau of Economic Analysis (see References).
