Watch Free Classes

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) Ã— 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.