The GDP deflator is a price index or inflation measurement tool used to calculate inflation. It tells us about the economy as a whole, and it doesn’t provide information about the price increase in a specific industry or specific beneficiaries.
Mathematically, a deflator is a value that helps us adjust the change of some data over time with regard to a base period. Here we use it for inflation measurement.
How to Measure Inflation Rate Using GDP Deflator?
To get a GDP deflator, we need to have Nominal and Real GDPs. Nominal GDP is the value of final goods and services produced in a country during an interval of time (monthly, quarterly, or annually) based on the current market price. And Real GDP is the inflation-adjusted final value of goods and services produced in a country during a period based on “base year prices.”
To measure the inflation rate using GDP Deflator, we need the Deflator and the Inflation Rate formulas.
GDP Deflator Formula:
Inflation Rate Formula Using GDP deflator:
Suppose that the Nominal GDP of a country this year (2022) is $54 billion, and its real GDP is $50 billion. The base year is (2021). Calculate the GDP deflator.
Considering the GDP deflator of last year’s 100 let’s calculate the inflation rate for 2022.
The above solution tells us that the price has risen 8% since last year.
The GDP deflator is a great tool for measuring inflation. It is simple to understand and simple to calculate.
I want to mention again inflation calculated using this method tells us about the whole economy and not in detail. Governments, businesses, and investors track the Consumer Price Index more than this method.