GDP Deflator - Explained
What is the GDP Deflator?
Written by Jason Gordon
Updated at March 28th, 2023
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What is the GDP Deflator?
The GDP deflator, which the Bureau of Economic Analysis measures, is a price index that includes all the GDP components (that is, consumption plus investment plus government plus exports minus imports). Unlike the CPI, its baskets are not fixed but re-calculate what that year’s GDP would have been worth using the base-year’s prices. MIT's Billion Prices Project is a more recent alternative attempt to measure prices: economists collect data online from retailers and then put them into an index that they compare to the CPI.
What’s the best measure of inflation? If one is concerned with the most accurate measure of inflation, one should use the GDP deflator as it picks up the prices of goods and services produced. However, it is not a good measure of the cost of living as it includes prices of many products not purchased by households (for example, aircraft, fire engines, factory buildings, office complexes, and bulldozers). If one wants the most accurate measure of inflation as it impacts households, one should use the CPI, as it only picks up prices of products purchased by households. That is why economists sometimes refer to the CPI as the cost-of-living index. As the Bureau of Labor Statistics states on its website: “The ‘best’ measure of inflation for a given application depends on the intended use of the data.”
Related Topics
- Inflation
- Core Inflation
- Cost Push Inflation
- Demand Pull Inflation
- Wage Push Inflation
- Inflation Spiral (Wage-Price Spiral)
- Agflation
- Basket of Goods and Services
- Indexing and Index Number
- Base Year
- Consumer Price Index
- Substitution Bias
- Quality / New Goods Bias
- Core Inflation Index
- Producer Price Index
- International Price Index
- Employment Cost Index
- Buying Power Index
- Breakfast Index
- Employment Cost Index
- Producer Price Index
- Capital Goods Price Index
- Farm (Agricultural) Price Index
- Harmonized Index of Consumer Prices
- Repeated Sales Method (Real Estate)
- GDP Deflator
- Deflation
- Pigou Effect
- Hyperinflation (Economics)
- Biflation
- Inflation and Redistribution of Purchasing Power
- Inflation Blurs Price Signals
- Inflation Affects Long-Term Planning
- What are the Benefits of Inflation?
- Indexing and Index Number
- Cost of Living Allowance
- Adjustable Rate Mortgage
