GDP Deflator

The GDP Deflator measures the level of prices of all new, domestically produced, final goods and services in an economy. In principle the volume of each good and service produced is multiplied first by its price in the period it was produced and second by its price in a base year. The sum across all goods and services of the first set of calculations gives nominal GDP in the period; the sum across all goods and services of the second set of calculations gives real GDP in the period. The ratio of nominal to real GDP gives the GDP deflator, which must equal 1 (or 100 if the ratio is multiplied by 100 as it usually is) in the base year. Since the combination of goods and services produced changes from year to year there is no fixed basket of goods here as there is in the case of the CPI. However, in practice Consumer Price Indices and GDP deflators behave in much the same way for most countries.

Both the CPI and the GDP deflator are conventionally expressed in index form, i.e. the value of the CPI or GDP deflator in an arbitrarily chosen year, say 2000, is denoted as 100 and then previous and subsequent years’ values are expressed in relation to that value: for example if the CPI in 2001 was 10% higher than the CPI in 2000 it would appear in index form as 110. For all the countries in the graph the GDP deflator is defined as 100 in 2000q1. From it we can tell that the GDP deflator of Australia grew the fastest between 2000 and 2015; the GDP deflators of France and the Netherlands, the slowest.