Gross Domestic Product Deflator

The Gross Domestic Product Deflator is an alternative general price index that reflects the importance of products in current markets baskets, rather than in base year market baskets, which become less relevant over time. Its formula is:

$GDP~Deflator={\frac {\sum (Current~year~quantity\times Current~year~price)~for~each~item}{\sum (Current~year~quantity\times Base~year~price)~for~each~item}}\times 100$

This formula differs from the CPI calculation in that current year quantities are used. The value of the GDP Deflator can be substituted for CPI values in the formulas for inflation and real GDP. Since the GDP Deflator reflects both price changes and substitutions away from goods that have become relatively expensive, it generally registers a lower inflation rate than the CPI.

See Also

Consumer Price Index