What is 'Gross National Product (GNP) Deflator'

Gross national product deflator is a 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 is calculated with the following formula:

Gross National Product (GNP) Deflator

BREAKING DOWN 'Gross National Product (GNP) Deflator'

The Gross National Product deflator provides an alternative to the Consumer Price Index (CPI). 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 to more accurately capture the effects of inflation since it's not limited to a smaller subset of goods.

The gross national product deflator also helps determine the real GNP, as opposed to the nominal figure. It is expressed via an equation in which the GNP deflator is equal to the nominal GNP divided by the real GNP, which is then multiplied by 100. The solution to the equation is shown as a percentage.

Calculating the Gross National Product Deflator

To solve the GNP deflator equation, a base period must first be determined and current GNP must be found. These metrics will indicate how much prices for products and services rise. This information is expressed with three decimal places.

There are several steps necessary to calculate the gross national product for the GNP deflator equation. First, the gross domestic product (GDP) is determined by finding the value of the products and services generated within a year or another set time period and within the borders of the country in question. The equation is the sum of four factors: government spending, private consumption and spending, the country’s net exports, and business spending.

With GDP known, additional money coming into and leaving the country is accounted for. The money earned overseas by residents of the country is added to the GDP, while money earned by residents overseas is subtracted. Then this figure is used to calculate the GNP deflator. 

Differences Between GNP and GDP

A major difference between GNP and GDP is that the latter only considers money earned in the country while the GNP accounts for international income and expenses. While the GDP accounts for a specific region, the GNP shows how the country is performing economically overall by using citizenship as a factor for determining value.

The GNP deflator is often confused with the GDP deflator. This economic metric uses the same equation, but switches the GDP for the GNP in the equation.

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