GDP Deflator

The GDP deflator measures the price change of all final goods and services produced within an economy. It compares nominal GDP at current prices with real GDP at constant prices, thereby separating the price component of changes in GDP.

Calculation and interpretation

The GDP deflator is an implicit price index, not the price of a separately specified basket.

• It is calculated as: GDP Deflator = (Nominal GDP / Real GDP) × 100.
• The index is normally 100 in the base year, because current-price and constant-price GDP are equal in that year.
• Its percentage change indicates the change in the economy-wide price level captured by GDP.

Coverage and characteristics

Its coverage follows the boundaries of domestic production used in national income accounting.

• It covers domestically produced final goods and services, including consumption, investment, government output and exports.
• Imports are not directly included because they are not part of domestic production.
• Unlike a fixed-basket index, its effective composition changes as the pattern of current production changes.

Why it can diverge from CPI and WPI

The indices can move differently because they measure prices at different stages, cover different products and use different weighting structures.

• The Consumer Price Index measures retail price changes faced by consumers using a specified basket of goods and services, including consumption goods that may be imported.
• The Wholesale Price Index primarily tracks prices of goods at the wholesale level and does not cover services.
• The GDP deflator reflects prices of consumption, capital goods, government output, services and exports, while excluding imports directly.
• CPI and WPI basket weights remain specified for their base periods, whereas the GDP deflator's effective weights change with the composition of current domestic production.
• Relative price changes in food, services, investment goods or exports can therefore affect the three indices differently.
• The GDP deflator converts nominal GDP into real GDP, while consumer inflation is better measured through the CPI.