What is GDP Deflator?
The GDP Deflator tracks the changes in the prices of all the goods and services produced within a country’s economy in order to measure its true economic state.
The GDP deflator, or “implicit price deflator”, essentially removes the effects of inflation from a country’s gross domestic product (GDP) to isolate the underlying growth in productivity.
Table of Contents
- How to Calculate GDP Deflator
- GDP Deflator Formula
- GDP Deflator vs. Consumer Price Index (CPI): What is the Difference?
- U.S. Implicit Price Deflator: Q-1 2021 to Q-2 2022 Graph
- Is CPI an Accurate Measure of Inflation?
- GDP Deflator Calculator
- 1. U.S. Nominal and Real GDP Economic Data
- 2. GDP Deflator Calculation and Analysis
How to Calculate GDP Deflator
The GDP deflator is utilized by economists and those monitoring the health of a country’s economy, specifically in the context of measuring the risk of inflation.
In economics, the term GDP stands for the “gross domestic product” and represents the total value of all goods and services produced within a country over a pre-determined period.
However, the rate of inflation in a country – i.e. the pricing levels of goods and services – can muddy whether a country is actually experiencing positive, increased economic activity.
In order to consider that risk factor, the GDP deflator, i.e. the “implicit price deflator”, removes the effects of inflation from the metric.
In effect, isolating a country’s GDP growth from inflation more accurately reflects the incremental change in GDP attributable to productivity rather than rising prices.
GDP Deflator Formula
The GDP deflator is the ratio between nominal GDP and real GDP, multiplied by 100.
Expressed formulaically, the equation to calculate the GDP deflator is as follows.
Where:
- Nominal GDP → The value of the goods and services produced within an economy produced before any adjustments for inflation.
- Real GDP → The value of the goods and services produced within an economy after adjusting for inflation.
The measure brings attention to the change in nominal GDP caused by inflation (i.e. the rise in prices) instead of increased productivity.
Based on the equation, we can derive that the implicit price deflator is the factor by which the nominal GDP can be adjusted to estimate the real GDP.
The calculation of the implicit price deflator includes exports to other foreign countries, whereas imports from other countries are excluded.
Hypothetically, if there were no inflation in a country, the nominal GDP would be equivalent to the real GDP, but of course, that would be rather unrealistic.