# What is the GDP Deflator and What does it measure?

By BYJU'S Exam Prep

Updated on: November 9th, 2023

GDP Deflator measures inflation, the ratio of the value of goods and services produced by an economy in a given year at current prices, to that of prices in the base year. It is calculated by multiplying the minor GDP by 100 and dividing it by the real GDP.

The GDP deflator, unlike the CPI, is not based on a fixed basket of goods and services; the GDP deflator’s “basket” is allowed to move from year to year in response to changes in people’s consumption and investment patterns.

Table of content

## GDP Deflator Measures in Economics

The GDP deflator is a tool used in economics to gauge the level of prices for all newly manufactured, domestically sourced final products and services over the course of a year. The GDP deflator often called the implicit price deflator, is a measure of inflation.

• It is the difference between what an economy generates in terms of commodities and services at the going rate in a given year and what that economy produced at the going rate in the base year.
• This ratio shows how much of the increase in the gross domestic product may be attributed to rising prices rather than higher output.
• As opposed to the constrained commodity baskets for the wholesale or consumer price indices, the deflator includes the full spectrum of commodities and services generated in the economy, making it a more accurate indicator of inflation.
• The GDP price deflator measures the difference between real and nominal GDP.
• Real GDP differs from nominal GDP because the latter does not account for inflation.

Summary:

## What is the GDP Deflator and What does it measure?

GDP Deflator is the ratio of a country’s economy’s value of goods and services generated in a particular year at current prices to base year prices. It is calculated by multiplying the nominal GDP by 100 and dividing it by the real GDP.

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