HM Treasury

Economic data & tools

User's guide: Background information on GDP and GDP deflator

The following pages are designed to provide more background detail about the GDP deflator, as well as providing some answers to basic questions.

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 on UK economic territory, wherever the earner of the income may reside. GDP is equivalent to the value added to the economy by this activity. Value added can be defined as income less intermediate costs. Therefore growth in GDP reflects both growth in the economy and price changes (inflation).

Theoretical Approaches to Measuring GDP

There are 3 measures of GDP.

These three measures should, in reality, be equal as they are measuring the same flows of money. However in practice all three measures are complicated to measure and so may vary. The Office for National Statistics (ONS) produces a single series by 'balancing' the three measures. GDP figures are released quarterly along with other National Accounts data and are available from the ONS or in it's publications such as Economic Trends and the Blue Book.

Current and Constant Price GDP

GDP, like many of the National Accounts aggregates, can be expressed in terms of either current or constant prices.

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.

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 statbase references for these series 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 statbase reference 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.

The base year and the reference year

ONS currently uses 2002 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 2002. 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.

The GDP deflator and other measures of inflation

Other widely known measures of inflation are the Consumer Prices Index (CPI, formerly known as the HICP), the Retail Prices Index (RPI), and the Retail Prices Index excluding mortgage interest payments (RPIX), all of which measure prices of goods and services purchased for the purpose of consumption by households in the UK. Further information on RPI, RPIX and CPI - and the differences between them - can be found at  http://www.statistics.gov.uk/cci/nugget.asp?id=181

The GDP deflator is a much broader price index than the CPI, RPI or RPIX (which only measure consumer prices) 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 subtracts the price of UK imports. The wider coverage of the GDP deflator makes it more appropriate for deflating public expenditure series.

Last Updated 23 May 2006

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