Consider the following statements about GDP Deflator:

1. It is an index number which measures inflation.

2. It is used to get the value of Nominal GDP from Real GDP.

Select the correct option from below:

The correct answer is Both 1 and 2.

Key Points

• GDP deflator is an index number which measures inflation.Hence, statement 1 is correct.
• When GDP is calculated in a country, it is measured at current years prices called Nominal GDP, which includes inflation.
• To remove this anomaly and to find the real growth according to the base year, Nominal GDP is divided by GDP deflator to get the value of Real GDP.
• It is used to get the value of Nominal GDP from Real GDP.
• But Nominal GDP can also derived from the formula of GDP Deflator. Hence, statement 2 is correct.

Additional Information

• The GDP deflator, also known as the implicit price deflator, is used to measure inflation. It is used to determine the levels of prices of the new, domestically produced final goods and services in a country in a year.
• GDP deflector shows the changes in the average price levels in the economy, and therefore, it is used in conjunction with the Consumer Price Index (CPI) for measuring inflation.
• GDP deflator consists of two important components which are nominal GDP and real GDP
• Nominal GDP is the monetary value of all the goods and services produced in an economy and is valued at current prices, while the real GDP shows the monetary value of all the finished goods and services in an economy calculated at constant prices.

For calculating GDP deflator, the following steps are necessary

• Determine the nominal GDP
• Determine the real GDP
• Find the GDP Deflator
• GDP deflator formula can be represented as
• GDP deflator = Nominal GDP / Real GDP × 100
• Like other price indices such as CPI, GDP deflector is not formed on a fixed basket of goods and services. The basket is altered every year depending on people’s investment and consumption patterns for that year.