GDP Deflator
AdvancedThe GDP deflator is a measure of the overall level of prices of all goods and services produced in an economy, calculated by dividing nominal GDP by real GDP and multiplying by 100.
Nominal GDP values output at current prices, while real GDP values it at the prices of a base year. The ratio between them shows how much prices have changed since the base year across everything the economy produces.
For example, if nominal GDP is 1,100 and real GDP, measured at base-year prices, is 1,000, the GDP deflator is 110. Prices across the economy are about 10% higher than in the base year.
The GDP deflator differs from the Consumer Price Index. The CPI tracks a fixed basket of goods and services bought by households, including imports. The GDP deflator covers all domestically produced goods and services, including investment goods and government services, and excludes imports. Its weights also change automatically as the mix of output changes.
Because of these differences, the two measures can give different inflation rates. The GDP deflator is useful for understanding price changes across the whole economy, while the CPI is more relevant to the cost of living.
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