<p>Typically if you have ratio variable then you don't need to deflate the series. This is because for example tax revenues are nominal and gdp is nominal in the ratio the respective price series would cancel out (assuming they are from the same year).</p>

<p>So if nominal tax revenues are RN=R<em>P and nominal GDP is GDPN=GDP</em>P  (where P is the price) then the ratio is RN/GDPN=R/GDP. That way if you choose the first option you suggested then you will get the exact same value as the original ratio (try it if you want).</p>

<p>I hope this helps.</p>

CC BY-SA 3.0
2016-11-13T12:53:58.473Z
2016-11-13T12:53:58.473Z
Andrew M
<p>Using Deflation index to create constant 2000 dollars, if I am finding a variable that is a ratio of that variable to GDP (say, income tax revenues), how do I go about this? Should I first divide my GDP variable for each year by the respective index value, then do the same for the income tax revenue variable, and then take the ratio of these newly adjusted variables? Or should I first find the ratio variable, income tax revenue/GDP, then divide this by the deflation index to form a constant dollar variable?</p>

<macroeconomics><econometrics><inflation><time-series>
Adjusting a ratio variable to constant 2000 dollars using a deflator index
EconNovice
# Adjusting a ratio variable to constant 2000 dollars using a deflator index

(Asked by: username_0 on 2016-11-13)

Using Deflation index to create constant 2000 dollars, if I am finding a variable that is a ratio of that variable to GDP (say, income tax revenues), how do I go about this? Should I first divide my GDP variable for each year by the respective index value, then do the same for the income tax revenue variable, and then take the ratio of these newly adjusted variables? Or should I first find the ratio variable, income tax revenue/GDP, then divide this by the deflation index to form a constant dollar variable?

**Tags:** macroeconomics, econometrics, inflation, time-series

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## 1 answers

### Answer by username_1 on 2016-11-13. Score: 1

Typically if you have ratio variable then you don't need to deflate the series. This is because for example tax revenues are nominal and gdp is nominal in the ratio the respective price series would cancel out (assuming they are from the same year).

So if nominal tax revenues are RN=R*P and nominal GDP is GDPN=GDP*P (where P is the price) then the ratio is RN/GDPN=R/GDP. That way if you choose the first option you suggested then you will get the exact same value as the original ratio (try it if you want).

I hope this helps.


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