GDP Deflator
Plain definition
The GDP deflator is a price index that converts nominal GDP into real GDP. It equals (nominal GDP / real GDP) x 100, so it captures the price changes affecting every good and service produced in the economy. A deflator above 100 means prices have risen since the base year.
In economics
Because the GDP deflator covers all domestically produced goods and services — including business investment and government spending — it is broader than the Consumer Price Index, which tracks only a household basket. Economists use it as the economy-wide measure of inflation, and central banks study it to separate genuine output growth from pure price effects when setting monetary policy.
Example
If nominal GDP is 20 trillion, the GDP deflator is (22 / 20) x 100 = 110. That reading of 110 means the overall price level has risen 10% since the base year. The deflator is also used to recompute real GDP: real GDP = nominal GDP / (deflator / 100).
The GDP deflator is often mixed up with the Consumer Price Index. The CPI measures price changes in a fixed basket of consumer goods, while the GDP deflator measures price changes for everything produced domestically, and its basket updates automatically with production. Also, a deflator of 100 is the base-year level, not a target inflation rate.