What Is the GDP Deflator?

The GDP deflator, also known as the implicit price deflator, is a measure that shows how much the prices of all goods and services produced in a country have changed over time. It helps us understand how much of the change in Gross Domestic Product (GDP) is due to changes in prices and how much is due to changes in production.

How Does the GDP Deflator Work?

The GDP deflator measures the rate of inflation in an economy. It does this by comparing the nominal GDP, which is the total value of all goods and services produced measured using current prices, to the real GDP, which is the total value measured using prices from a base year. This shows the change in the price level.

Calculation

The GDP deflator is calculated using the following formula:

GDP deflator = (Nominal GDP / Real GDP) x 100, where:

  • Nominal GDP: The value of all goods and services produced in a country, measured using current prices.

  • Real GDP: The value of all goods and services produced in a country, measured using prices from a base year.

To find the change in the overall price level (%), use this formula:

Change in the overall price level (%) = GDP deflator - 100

Interpretation

The results of the GDP deflator can be interpreted as follows:

  • GDP deflator of 100: Indicates no change in prices from the base year.

  • GDP deflator greater than 100: Indicates that the overall price level has increased since the base year (inflation).

  • GDP deflator less than 100: Indicates that the overall price level has decreased since the base year (deflation).

Example

Suppose in 2024, a country's nominal GDP is $1.1 trillion, and its real GDP (using 2023 as the base year) is $1 trillion. The GDP deflator would be:

GDP deflator = (1.1 / 1) x 100 = 110

This means that the overall price level in the country has increased by 10% since 2023.

Learn more: GDP Deflator.