Real Vs Nominal GNP: "Deflating" by a price Index
One of the problems that confront economists when measuring GNP is that they have to use money as the measuring rod. These days however, inflation sends the general price level up and up clearly this means that the yardstick stretches in their hands everyday.
Economists repair most of the damage wrought by the elastic yardstick by using a price index. The price index used to remove inflation (or "deflate'' the GNP) is called the GNP deflator. The GNP deflator is defined as the ratio of nominal GNP to real GNP. It is constructed as follows:
GNP Deflator = Nominal GNP
Real GNP
Real GNP = Value at current Price
CPI
Where CPI is Consumer Price Index
The GNP deflator is useful because it includes prices on all goods and services in GNP.