What does the GDP deflator measure?

The GDP deflator is an important economic metric that measures the overall change in price levels for all goods and services produced in an economy, relative to a base year. It reflects the price movements in the economy, encompassing the entire spectrum of domestic production, making it a broader measure compared to other indices such as the Consumer Price Index (CPI), which focuses specifically on consumer goods.

The GDP deflator is calculated by taking the nominal GDP (which includes current prices) and dividing it by the real GDP (which is adjusted for inflation), thereby providing insights into how much of the growth in nominal GDP can be attributed to changes in price levels rather than actual increases in output. This makes the deflator a comprehensive indicator of inflation in the economy, as it accounts for the shifting composition of the economy over time, considering all sectors rather than just consumer spending or specific goods or services.

Through this, it enables policymakers and analysts to gauge the inflationary pressures within the economy effectively, informing decisions related to economic policy and investment strategies.