Learn about the Difference between the term Deflator and Deflation?

What is GDP Deflator?

The GDP Deflator is calculated as the ratio of the Nominal GDP associated with current price levels, to the Real GDP that is adjusted for historical price changes. 

What the Difference Between GDP Deflator and Inflation Rate

Both the GDP Deflator and Inflation Rate measures the historical trend of price increases for a country.

Inflation rate is calculated using the Consumer Price Index (CPI) which is the difference in price value based on predefined basket of goods & services. Unlike the CPI, the GDP Deflator is not based on predetermined mix of goods and services. The GDP deflator's basket of goods and services is based on the total aggregate consumption and investment pattern of the country's people.This means that changing consumption habits will show up in the deflator but not in the CPI.

Why is the GDP Deflator An Important Figure?

Historically the difference between the Consumer Price Index (CPI) and the GDP Deflator is very small. However if any government were to try and manipulate the CPI to show an artificially low Inflation Rate, then difference between CPI and Deflator should theoretically become larger.

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