Introduction
- GDP Deflator is a price index which measures the Gross Domestic Product (GDP) by adjusting the impact of inflation in an economy.
- It is also called the implicit price deflator.
Significance of GDP Deflator
- It serves the specific purpose of giving the real GDP from the nominal GDP by deflating the price effect.
- It is used as a measure of inflation as it shows the extent to which the increase in GDP has happened on account of higher prices rather than an increase in output.
- It is the most general measure of the overall price levels.
- It takes into account changes in government consumption, capital formation, international trade and household consumption.
- GDP Deflator is not based on a fixed basket of goods and services, it covers the whole economy including services.
- Changes in consumption patterns or the introduction of goods and services are automatically reflected in the GDP deflator.
Calculation of GDP Deflator
- GDP Deflator is calculated by dividing the nominal GDP by the real GDP and then the result is multiplied by 100.
GDP Deflator = (Nominal GDP / Real GDP) × 100
- Nominal GDP captures the value of all goods and services at current prices, while real GDP is the valuation of the same at constant prices without the effect of inflation.
- GDP deflator is very similar to other indices like the Consumer Price Index (CPI) and Wholesale Price Index (WPI), but the only difference is GDP deflator is not based on a fixed basket of goods and services. It is determined on the basis of a dynamic basket- which covers all the goods and services in an economy.