The GDP price deflator takes into consideration both the nominal GDP and the real GDP of an economy. The nominal GDP represents the value of the finished goods and services that an economy has produced, unadjusted for inflation, whereas the real GDP represents the value of the finished goods and services that an economy has produced, adjusted for inflation. Therefore, if there was no inflation involved, the nominal GDP would equal the real GDP. The GDP price deflator calculates the impact of inflation on the finished goods and products by converting an economy’s output into current prices, thereby demonstrating the impact of inflation on the GDP change.
In a nutshell :
- The GDP price deflator measures the changes in prices for all of the goods and services produced in an economy.
- Using the GDP price deflator helps economists compare the levels of real economic activity from one year to another.
- The GDP price deflator is a more comprehensive inflation measure than the CPI index because it isn't based on a fixed basket of goods.