In the third quarter of 2009, the GDP deflator increased while export and final domestic demand prices were both falling. How do changes in import prices impact the GDP deflator?
The GDP deflator is often referred to as a broad measure of price change in the economy. It is important to keep in mind that GDP measures the value added from production processes in the domestic economy only. Calculating GDP as the sum of final domestic expenditures and exports overstates the true value of GDP because there is import content in final domestic expenditures. Therefore, it is important that imports are included as a deduction item when calculating expenditure-based GDP. Likewise, the GDP deflator is measuring the price of value added from production processes in the domestic economy. Calculating the GDP deflator based only on the price movements of final domestic expenditures and exports is not accurate because there is import content in final domestic expenditures. Therefore, when calculating the GDP deflator, it is important to remove the effect of import price movements on final domestic expenditures, leaving only the effect of domestic value added. Import prices may
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