Recently, I was analyzing economic indicators and realized that many people are confused about how inflation is measured. I’d like to share what the GDP deflator is in practice.

In general, the GDP deflator is essentially a tool that shows how much prices for goods and services in a country have changed over a certain period. The main difference from a regular price index is that it covers literally everything produced in the economy. This helps to understand whether the economy has grown due to increased production or simply because everything has become more expensive.

How does it work? It’s quite simple. Two indicators are used: nominal GDP (the value of goods at current prices) and real GDP (the same value but at base year prices). When you divide one by the other and multiply by 100, you get the GDP deflator. The formula looks like this: GDP Deflator = (Nominal GDP / Real GDP) x 100.

To find out how much prices have increased in percentage terms, just subtract 100 from the GDP deflator value.

Now, the interpretation. If the GDP deflator equals 100 — prices haven't changed since the base year. If it's greater than 100 — inflation has occurred, prices have risen. If it's less than 100 — deflation, prices have fallen. It’s all logical.

Here’s a specific example to make it clearer. Suppose in 2024, the country's nominal GDP reached $1.1 trillion, and the real GDP (with 2023 as the base year) was $1 trillion. Calculating: 1.1 divided by 1, then multiplied by 100 — results in 110. This means the GDP deflator is 110, indicating that prices increased by 10% over the year.

That’s what the GDP deflator is — a useful tool for understanding the real economic situation in a country, not just nominal GDP figures.