What is the Gross National Product (GNP) Deflator?

The gross national product deflator is an economic metric that accounts for the effects of inflation in the current year's gross national product by converting its output to a level relative to a base period. The GNP deflator can be confused with the more commonly used gross domestic product (GDP) deflator. The GDP deflator uses the same equation as the GNP deflator, but with nominal and real GDP rather than GNP.

Understanding the Gross National Product (GNP) Deflator

The gross national product deflator is simply the adjustment for inflation that is made to nominal GNP to produce real GNP. The GNP deflator provides an alternative to the Consumer Price Index (CPI) and can be used in conjunction with it to analyze some changes in trade flows and the affects on the welfare of the people within a relatively open market country. The CPI is based upon a basket of goods and services while the GNP deflator incorporates all of the final goods produced by an economy. This allows the GNP deflator to more accurately capture the effects of inflation since it's not limited to a smaller subset of goods.

Calculating the Gross National Product (GNP) Deflator

The GNP deflator is calculated with the following formula:

GNP Deflator = (Nominal GNP/Real GNP) x 100

The result is expressed as a percentage, usually with three decimal places. The first step to calculating the GNP deflator is to determine the base period for analysis. In theory, you can work with GDP and foreign earnings data for the base period and current periods and extract the figures need for the deflator calculation. However, nominal GNP and real GNP figures, as well as the deflator charted over time, can usually be accessed through releases from central banks or other economic entities. In the United States, the Bureau of Economic Analysis, the St. Louis Federal Reserve Bank and others provide this data as well as other indicators that track similar economic statistics that measure essentially the same thing but through different formulations. So actually calculating the GNP deflator is usually unnecessary. The more important task is how to interpret the data that the GNP deflator is applied to.

Interpreting GNP Figures

The GNP deflator, as mentioned, is just the inflation adjustment. The higher the GNP deflator, the higher the rate of inflation for the period. The relevant question is what having an inflation-adjusted gross national product - the real GNP - actually tells you. The real GNP is simply the actual national income of the country being measured. It doesn't care where the production is located in the world as long as the earnings come back home. In terms of differences between real GNP and real GDP, real GDP is the preferred measure of U.S. economic health. Real GNP shows how the U.S. is doing in terms of its foreign investments in addition to domestic production.