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Gross Domestic Product (GDP) refers to the total or combined demand for final goods and services in a country within a stated period. Nominal GDP refers to the current prices for goods in a country at a certain point in time. It offers a glimpse of what the prices are only for the moment under consideration. The GDP deflator shows how the nominal GDP is different from the real GDP after adjustments have been made to the nominal GDP result in response to inflation. It is affected by the changing patterns of consumer demand.
Before the GDP deflator can be applied, the values of both the real GDP and nominal GDP must be calculated in order to have a basis for comparison and subtraction. The process of calculating both the real and nominal GDP of a nation with a view to arriving at the GDP deflator involves the assessment of the effects of demand and supply. Also, the only products under consideration are the final products and not the raw materials since counting both may result in counting the same item repeatedly. For instance, GDP does not count the cocoa as well as the chocolate made out of the cocoa since the result would be misleading. The cocoa is the raw material used to make the chocolate and will only be considered if it has not been used to produce chocolate by the end of a business cycle.
The real GDP is derived by calculating the total consumer demand for goods in a business cycle, which may be each quarter, in relation to the median calculation for a number of cycles. Nominal GDP is only concerned with the calculations of the same consumer demand for the moment at hand, making it always higher than the GDP. The GDP deflator is used to calculate the accurate prices by taking into consideration the differences in prices. This figure that is derived is the GDP deflator, and it may change with increased consumer demand in response to various factors.
The GDP deflator is usually measured in terms of a basket of commodities in which the price of the goods in the basket is measured over time. It may be influenced by too much output, which does not measure up to the demand and causes the prices to fall. It may also be affected by too much demand, which will push the prices of the commodities to a range that is higher than normal.