BBP-deflator

The GDP deflator measures the overall change in prices of domestically produced goods and services within an economy. It shows how much of the increase in GDP is due to rising prices, rather than real growth in production.

The GDP deflator is calculated using this formula.

For example, in Year 1, both nominal and real GDP are $100 billion. The GDP deflator would be 100, which corresponds to the base year.

In Year 2, nominal GDP rises to $110 billion, while real GDP, is only $105 billion. The GDP deflator becomes 104.76. This means the overall price level has risen by 4.76% since the base year.

In simple terms, the GDP deflator distinguishes real economic growth from the illusion created by inflation.

Economists and policymakers widely use it to track inflation and assess the economy's health over time. Some companies also use the GDP deflator to adjust long-term contract payments.