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1. Overview of GDP deflator series
1.1 What is the GDP deflator?
The GDP deflator can be viewed as a measure of general inflation in the domestic economy. Inflation can be described as a measure of price changes over time. The deflator is usually expressed in terms of an index, i.e. a time series of index numbers. Percentage changes on the previous year are also shown. The GDP deflator reflects movements of hundreds of separate deflators for the individual expenditure components of GDP. These components include expenditure on such items as bread, investment in computers, imports of aircraft, and exports of consultancy services.
1.2 Uses of the GDP deflator series
The series allows for the effects of changes in price (inflation) to be removed from a time series, i.e. it allows the change in the volume of goods and services to be measured. The resultant series can be used to express a given time series or data set in real terms, i.e. by removing price changes.
1.3 Where do the figures come from?
A series for the GDP deflator in index form is produced by the Treasury from data provided by the Office for National Statistics (ONS). Forecasts are produced by the Office for Budgetary Responsibility (OBR) and are usually updated around the time of major policy announcements, namely; the Chancellor’s Autumn Statement, and the Budget.
1.4 Rounding Convention
GDP deflators for earlier years (up to and including the most recent year for which full quarterly data have been published) are presented to 3 decimal places. The index for future years has been removed as the forecasts were not as accurate as this detail would suggest. Percentage year-on-year changes are given to two decimal places for earlier years, forecast years are presented to 1 decimal place as published in the Autumn Statement and the Budget.
- updates to earlier years (up to and including the most recent year for which full quarterly data have been published) shortly after the ONS Quarterly National Accounts release
- when the OBR updates its forecasts, shortly after the Budget and again after the Chancellor’s Autumn statement
2. Background information on GDP and GDP deflator
2.1 What is GDP?
Gross Domestic Product (GDP) is a measure of the total domestic economic activity. It is the sum of all incomes earned by the production of goods and services within the UK economic territory. It is worth noting that where the earner of the income resides is irrelevant, so long as the goods or services themselves are produced within the UK. GDP is equivalent to the value added to the economy by this activity. Value added can be defined as income less intermediate costs (costs as a result of the production of the final goods or services). Therefore growth in GDP reflects both growth in the economy and price changes (inflation).
2.2 Theoretical Approaches to Measuring GDP
There are 3 approaches to measuring GDP:
The production approach
The production approach to GDP, known as GDP(P), is the sum of all production activity within an economy. In the form of an equation, this is described by:
- GDP(P) = output – intermediate consumption + taxes on products – subsidies on products
- output is all the goods and services produced, whilst intermediate consumption comprises all the goods and services consumed or transformed in a production process; the taxes and subsidies are included in order to put all three approaches on a consistent valuation basis
The expenditure approach
The expenditure approach to GDP, or GDP(E), is the sum of all final expenditures within an economy. In equation form, this is as follows:
- GDP(E) = household final consumption expenditure + final consumption expenditure of non-profit institutions serving households (NPISHs) + general government final consumption expenditure + gross capital formation + exports – imports
- final consumption expenditure is expenditure on goods and services purchased for the last time and not to be consumed or transformed in a production process; gross capital formation comprises investment in fixed assets, changes in inventories and net acquisition of valuables
- exports and imports relate to trade in goods and services with the rest of the world and do not include other cross-border financial flows
The income approach
The income approach to GDP, or GDP(I) is the sum of all factor incomes within an economy. This could also be described as the sum of incomes directly generated by productive activity. In equation form:
- GDP(I) = compensation of employees + gross operating surplus + mixed income + taxes on production and products – subsidies on production and products
- compensation of employees is all income from employment, including employers’ pension and social contributions; operating surplus is primarily made up of trading profits and rental income, whilst mixed income is the income of the self-employed
(The description of the 3 approaches above is taken from the ONS’ UK National Accounts 2012 release)
These 3 measures should, in reality, be equal as they are measuring the same flows of money. However in practice all 3 measures are complicated to measure and so may vary. The Office for National Statistics (ONS) produces a single series by ‘balancing’ the 3 measures. GDP figures are released quarterly along with other National Accounts data and are available from the ONS or in its publications such as UK Economic Accounts and the Blue Book.
2.3 Current and Constant Price GDP
GDP, like many of the National Accounts aggregates, can be expressed in terms of either current or constant prices.
Current price figures measure value of transactions in the prices relating to the period being measured. Constant price figures express value using the average prices of a selected year, this year is known as the base year. Constant price series can be used to show how the quantity or volume of goods has changed, and are often referred to as volume measures. The ratio of the current and constant price series is therefore a measure of price movements, and this forms the basis for the GDP deflator.
2.4 ONS GDP series used to construct the GDP deflator
The GDP deflators are constructed from ONS single GDP series for current and constant prices (as explained above) on a seasonally adjusted basis. The ONS uses 4-character identifiers to label their series and these are YBHA and ABMI respectively. These seasonally adjusted GDP series are used to calculate the GDP deflator (rather than the not seasonally adjusted GDP series for current and constant prices) because some components of the GDP series for constant prices are collected on an annual calendar year basis, and the quarterly series are then interpolated from that series, and the ONS advise that the seasonally adjusted quarterly GDP series for constant prices is the more reliable series for the purposes of calculating the GDP deflator.
The series shown for money GDP, in the separate table alongside the GDP deflator series, is the ONS single GDP series for current prices on a non seasonally adjusted basis. The ONS identifier for this series is BKTL. This series is collected on a quarterly basis and is the best series to use for the purposes of calculating public spending as a percentage of GDP.
2.5 The base year and the reference year
As of April 2013 the ONS uses 2009 as the base year for GDP (ie GDP at constant prices). This means that the individual components of GDP that are aggregated together are done so using the prices relating to 2009. It is often helpful to change the reference year so that another point is referenced as 100. For the purposes of the GDP deflator series prices are shown relating to the last full financial year. For further information on the reference year and index numbers see Annex A: How to use the GDP deflator series: Practical examples, changing the reference year.
2.6 The GDP deflator and other measures of inflation
The Consumer Prices Index (CPI) and the Retail Prices Index (RPI) are the two main measures of consumer inflation in the UK. The Producer Price Index (PPI) measures the price changes of goods bought and sold by UK manufacturers. The Services Producer Price Index (SPPI) measures the price changes of services provided by UK businesses to other businesses and government.
The GDP deflator is a much broader price index than the CPI, RPI (which only measure consumer prices), or PPI as it reflects the prices of all domestically produced goods and services in the economy. Hence, the GDP deflator also includes the prices of investment goods, government services and exports, and excludes the price of UK imports. The wider coverage of the GDP deflator makes it more appropriate for deflating public expenditure series.
3. Practical examples of how the deflator series can be used
We have put together an extract from a deflator series that provides examples of how the series can be used.