A primary application of the GDP deflator is to adjust nominal GDP for inflation, thereby converting it into real GDP. This process, often called 'deflating' nominal GDP, allows for the measurement of an economy's output growth by removing the effects of price changes. By rearranging the deflator's formula, real GDP can be calculated as: $$ \text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100 $$

Using the GDP Deflator to Calculate Real GDP

The GDP deflator is expressed as the ratio of nominal GDP (measured at current prices) to real GDP (measured at constant prices), typically multiplied by 100 to create a price index. This formula provides a direct method for calculating the economy's overall price level from the two primary measures of economic output. The formula is: $$ \text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 $$

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The GDP deflator is a price index that measures the change in the price level of all final goods and services produced within a country's borders. Unlike the Consumer Price Index (CPI), which is based on a specific basket of consumer goods, the GDP deflator's scope covers all components of domestic GDP (consumption, investment, government spending, and exports). Consequently, it includes the prices of exported goods but excludes the prices of all imported goods.

GDP Deflator

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

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