GDP Deflator

The GDP deflator is a broad measure of the price level of all final goods and services produced within an economy. It compares nominal GDP, measured at current prices, with real GDP, measured at constant prices, thereby separating the price component of changes in GDP.

Calculation and interpretation

The deflator is an implicit price index rather than 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 for that year.
• The percentage change in the deflator between two periods 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.

Difference from other price indices

The GDP deflator is broader than consumer or wholesale price indices, but each index serves a different purpose.

• The Consumer Price Index measures price changes faced by consumers using a specified basket of goods and services.
• The Wholesale Price Index primarily tracks prices of goods at the wholesale level and does not cover services.
• The GDP deflator is useful for converting nominal GDP into real GDP, while consumer inflation is better measured through the CPI.