Deflating aggregates
Also called: Price deflation of national income · Topic: Inflation and Index Numbers: CPI, WPI, IIP and the Deflator · NCERT: Class 11, Ch 7 "Index Numbers"
Meaning
Deflating aggregates means using a price index to remove the effect of price changes from a nominal total, such as national income or capital formation. A nominal total is one measured at current prices. After deflating, only the change in real volume is left: Real value = (nominal value ÷ price index) × 100. Class 11 NCERT names the WPI as the index used for this. In practice, parts of the CPI and WPI are used to deflate the matching sectors.
Example
Output worth ₹1,650 at current prices, deflated by a price index of 150, gives ₹1,650 × 100/150 = ₹1,100 in real terms. There is a known weakness here. The WPI has no services, yet services are more than half of GDP. In 2015-16, WPI inflation was very low or negative, and deflating by it could overstate real GDP growth.
Don't confuse with
- Deflation: that is a fall in the general price level. Deflating is a statistical step that turns nominal figures into real ones.