A GDP deflator or implicit price deflator is a ratio of nominal GDP to real GDP. Its change measures aggregate price movement in the economy, hence is inflation indicator.
Unlike the consumer price index (CPI) and producer price index (PPI), GDP deflator covers all goods and services in the economy. It does not just incorporate raw material prices, intermediate products, end products, and services; but also public goods, which is excluded in the two indexes.
The formula in calculating GDP deflator
Central Bureau of Statistics measures GDP deflator by dividing nominal GDP to real GDP and then multiply it by 100.
GDP Deflator = (Nominal GDP/Real GDP) x 100
Nominal GDP contains inflation and quantity effects, while real GDP is only quantity. So, as long as there is an upward pressure in the general price, nominal GDP will higher than real GDP. Both numbers will be the same in the base year.
Furthermore, if we divide the nominal GDP by real GDP, we will basically get an aggregate price level. So, in this case, the change in implicit price deflator figures from period to period reflects the inflation rate.
Inflation rate = [(GDP deflatort/GDP deflator t-1) – 1] x 100%
For example, we obtain nominal GDP and real GDP data as follows:
| Year | Nominal GDP | Real GDP |
| 2009 | 3,500 | 2,345 |
| 2010 | 3,451 | 2,131 |
From the table above, the implicit price deflator in 2009 was 149.3 = (3,500/2,345) x 100; while for 2010, the value is 161.9 = (3,451/3,451) x 100. From the two deflator data, inflation rate in 2010 was 8.5% = {(161.9/149.3) -1} x 100%.
Difference with CPI
Although both measure inflation, CPI and implicit price deflator is slightly different in their components. The latter covers all goods and services in the economy (those bought by consumers, wholesalers and producers), while CPI only includes products and services in consumer shopping baskets.
For instance, when the price of coffee goes up, and the price of tea does not change, people switch to tea. CPI excludes coffee because it is not consumed by consumers, while the deflator does.
Furthermore, CPI also does not include capital goods because households do not use them. But, the implicit price deflator incorporates them.
Also, the GDP deflator only covers domestic goods and excludes imported goods. In contrast, some consumers buy imported goods, so they are included in the CPI calculation. On the other hand, the CPI does not account for exported goods, but the GDP deflator does it.