INTRODUCTION
The purchasing power of a dollar changes over time (typically decreasing) due to changes in prices (typically increasing, but this varies by item and year). The generalized increase in prices over time is known as inflation. In times of inflation, a dollar in the current year will not be able to purchase as much as it did in previous years. As such, a current dollar is not worth as much as a previous-year dollar and will not spur the same amount of economic activity when spent.
It’s important to note, however, that not all goods and services are inflationary every year. For example, the prices of consumer electronics often decrease over time. The prices of agricultural commodities rise and fall in response to many factors, including weather and the price of diesel, the latter of which also often fluctuates in price.
A deflator is a metric that helps analysts adjust economic data points for inflation/deflation by converting values expressed in nominal dollars (not adjusted) to real dollars (adjusted). IMPLAN applies deflators automatically. IMPLAN provides deflator data that includes the values necessary for converting dollar values from nominal dollars to real dollars, which adjusts for inflation between the Data Year and a particular Dollar Year.
DEFLATORS IN ANALYSIS
Over time, the prices of goods and services throughout economies fluctuate (usually increase). For instance, any given good or service today is likely to be more expensive next year, and then will continue becoming more expensive each year thereafter. Because of this, analysts can't simply compare Output values (e.g. industry sales figures) from different years to one another without modification, due to inherent, and often dramatic, differences between the economic contexts from which they come. This issue is especially problematic when modeling economic impacts.
The term “deflator” is most commonly heard during discussions surrounding Gross Domestic Product (GDP). For this reason, deflators are often referred to specifically as GDP deflators or implicit price deflators. While one of these two terms is used predominantly by most other economic resources, IMPLAN simply chooses to use the blanket term "deflator" to refer to these values due to the uniform nature in which they are applied within the software. However, it's important to understand that "deflator", "GDP deflator", and "implicit price deflator" are semantically interchangeable.
In a mathematical sense, a deflator is an index number which represents the ratio of nominal GDP to real GDP, and which allows analysts to adjust for relative price changes over time.
In a literal sense, a deflator is merely a numeric value which is calculated by dividing nominal GDP by real GDP, and then by multiplying the resulting quotient by 100. The written mathematical formula for this calculation is:
GDP deflator = (Nominal GDP) / (Real GDP) x 100
DEFLATORS IN IMPLAN
IMPLAN applies deflators automatically. The software is built to do this implicitly during the process of calculating results, so analysts don't need to perform any physical steps in order to ensure their use. Furthermore, the mathematical application of them by the software happens largely behind-the-scenes, so analysts can be left to carry out their studies without ever worrying about overlooking this crucial element.
IMPLAN's Deflators are indexes of inflation, with the deflator for the model Data Year set at 1.00. Deflators in IMPLAN ensure that an analyst's impact results are adjusted for inflation, or relative price changes over time. Deflators enable IMPLAN to deliver more accurate and reliable results to analysts by adjusting them to minimize these discrepancies.
The deflators are not used to create the social accounts or multipliers. They are necessary for impact analysis whenever the Dollar Year of the Event differs from the Data Year. The same Data Year multipliers are used regardless of the Dollar Year of the event; it is the value applied to those multipliers that changes when the dollar year of the event differs from the year of the model data. Indeed, if one were to run an un-customized event using an Event year that differs from the model year but views the results in the same year as the model, the multipliers calculated from these results will match the multipliers displayed in the multipliers tables of the model.
Deflators should be used every single time an economic impact is modeled. Without doing so, an analyst's findings will not be an accurate reflection of the true impact they're modeling. There are cases, however, in which no conversion from nominal dollars to real dollars is necessary because all of the analyst's inputs represent data points from the same year. In these instances, IMPLAN will still technically apply a deflator to account for inflation, but that deflator will simply be equal to 1. When this is true, no mathematical alterations to one's impact results will be observable, despite them still having been "adjusted" for inflation.
All the relationships in the multipliers are based on model year prices, so the Direct Effects applied to those multipliers need to also be in model year dollars - this is accomplished via the deflators. The value applied to the multipliers is the user-entered value divided by the deflator. The deflators also allow impact results to be viewed in years other than the model year, regardless of whether or not the dollar year of the event differs from the year of the model data.
While the event values and/or result values can be inflated or deflated, depending on whether the index value being applied is less than 1.00 or greater than 1.00 (i.e., depending on the Industry/Commodity and whether one is adjusting to a future or past value), we use a single term – deflators – to refer to all of these index values.
The Output deflators are specific to the Industry/Commodity and are applied to the Output value, while the GDP deflators are the same for every Industry/Commodity and are applied to all of the Value Added components.
IMPLAN actually applies deflators during the late stages of an analysis; when it calculates results. This means that the effects of using deflators are seemingly invisible to the analyst during most interactions with the software itself. That is, if an analyst inputs $10 million of industry output in 2017 dollars (nominal dollars) into the software, the software will not dynamically recalculate, and then re-display, that $10 million of industry output in 2018 dollars (real dollars) upfront. Instead, the software will accept all of the raw inputs which the analyst provides as they are (even if provided in nominal dollars), apply deflators during the calculation of results, and then simply display those results in the Dollar Year selected. For the analyst, this alleviates the need to convert their inputs into real dollars prior to using the software, and ultimately, makes economic impacts both faster and easier to model, not to mention more accurate.
SOURCE DATA
The Bureau of Economic Analysis (BEA) provides historical output deflators which we use for past to current years. For projections into the future, we use the annual rate of change from the Bureau of Labor Statistics’ (BLS) employment growth model. The BEA also has historical GDP deflators which we use for past to current years. For projections into the future, we use the annual rate of change from the BLS employment growth model for "All Industries". For more, read Deflator Data Sources.
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Written September 30, 2024