5.5. Base Year, GDP Deflator

GDP Deflator: It is a tool to measure the inflation comprehensively. It represents the ratio of GDP at current prices to GDP at constant prices. GDP deflator is published on a quarterly basis since 1996 with a lag of two months. It is because of this very reason that economists prefer the use of WPI or CPI for deflating nominal price estimates to derive real price estimates.

Essentially GDP deflator = (Nominal GDP/Real GDP) * 100.

Unlike the WPI and the CPI, GDP deflator is not based on a fixed basket of goods and services, it covers the whole economy. One of the other advantages of GDP deflator is that changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator, such a feature is missing in WPI/CPI.

Base Year: To make the calculation of GNP/GDP easier, economists use a price index to find the real GNP/GDP. A Price index is a number showing the changes in the overall level of prices. It shows a change in the general price level of an economy. Base year is the year used as the beginning or the reference year for constructing an index, and which is usually assigned an arbitrary value of 100.

The Indian Government has changed the base year for calculating national accounts to 2011-12 from 2004-05. The basis for selection of the base year are:

♤ Stability of macroeconomic parameters. It has to be a normal year without large fluctuations in production, trade and prices of goods and services.

♤ Data availability: Data available for the year should be reliable.

♤ Comparability- so that same parameters should be in use in both the years. Therefore, it should be a recent year and not go long back into history.