GDP Deflator

Published Dec 30, 2022

Definition of GDP Deflator

The GDP deflator is an economic indicator used to measure the price level in an economy. It is calculated by dividing the nominal GDP (i.e., GDP at current prices) by the real GDP (i.e., GDP at constant prices) and multiplying the result by 100. The GDP deflator is mainly used to compare the value of goods and services produced in different years.

Example

To illustrate this, let’s say the nominal GDP of a country in 2020 is USD 1,000 billion, and the real GDP is USD 800 billion. To calculate this year’s GDP deflator, we can use the formula from above and divide the nominal GDP by the real GDP and multiply the result by 100. That means the result for 2020 is 1,000/800 x 100 = 125.

Now let’s say the nominal GDP of the same country in 2021 is USD 1,200 billion, and the real GDP is USD 900 billion. To calculate the GDP deflator for 2021, we divide the nominal GDP by the real GDP and multiply the result by 100. That means the result for 2021 is 1,200/900 x 100 = 133.3.

Why GDP Deflator Matters

The GDP deflator is an important economic indicator because it helps to measure the price level in an economy. It is used to compare the value of goods and services produced in different years. This is critical because it allows economists to compare the economic performance of different countries and to measure the impact of inflation on the economy over time. In addition to that, the GDP deflator is also used to calculate the real GDP growth rate, which is a widely used indicator of economic health and development.