In macroeconomics, how is the GDP deflator (a price index for all domestically produced final goods and services) calculated for a given year?

• A. GDP deflator $=\frac{\mathrm{Nominal}\mathrm{GDP}}{\mathrm{Real}\mathrm{GDP}}\times 100$
• B. GDP deflator $=\frac{\mathrm{CPI}-100}{100}$
• C. GDP deflator $=\frac{\mathrm{Real}\mathrm{GDP}}{\mathrm{Nominal}\mathrm{GDP}}\times 100$
• D. GDP deflator $=\frac{\mathrm{Nominal}\mathrm{GDP}-\mathrm{Real}\mathrm{GDP}}{\mathrm{Real}\mathrm{GDP}}\times 100$

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the components involved. The GDP deflator is a price index that measures the average price level of all domestically produced final goods and services in an economy. It compares the current year's prices to the prices in a base year.
2. Step 2: Identify the two key GDP measures needed: Nominal GDP and Real GDP. Nominal GDP is the market value of goods and services produced in a year using current prices, while Real GDP is the value using constant prices from a base year to remove the effect of inflation.
3. Step 3: Use the formula for the GDP deflator, which is the ratio of Nominal GDP to Real GDP, multiplied by 100 to convert it into an index number. This can be written as: \[GDP\ deflator = \frac{Nominal\ GDP}{Real\ GDP} \times 100\]
4. Step 4: Calculate Nominal GDP and Real GDP for the given year using the available data. Nominal GDP is usually given or calculated using current prices, and Real GDP is calculated using base year prices.
5. Step 5: Plug the values of Nominal GDP and Real GDP into the formula and perform the division and multiplication to find the GDP deflator, which reflects the overall price level changes relative to the base year.