Recently, I was exploring how inflation actually works in the economy and came across an interesting tool — the GDP deflator. It turns out, this isn’t just dry statistics but a quite useful indicator for understanding the real situation in a country.

In general, the GDP deflator (or implicit price deflator, as it’s also called) shows how prices for everything produced in the economy change — from goods to services. But here’s the point: when GDP grows, it’s unclear whether it’s because more is being produced or simply because prices have jumped. The deflator helps clarify this question.

How does it work? It’s quite simple — take the nominal GDP (the total value at current prices) and divide it by the real GDP (the value in base year prices). Here’s the formula for the GDP deflator: take the nominal GDP, divide by the real GDP, and multiply by 100. This gives a number that shows how much prices have changed in percentage terms.

To better understand what this means, let’s look at an example. Imagine that in 2024, the nominal GDP of a country was 1.1 trillion dollars, and the real GDP (with 2023 as the base year) was 1 trillion. Applying the formula: 1.1 divided by 1, then multiplied by 100 — you get 110. This means prices increased by 10% over the year.

Now, interpreting the results. If the deflator equals 100 — nothing has changed in prices. If it’s above 100 — inflation, prices are rising. If it’s below 100 — deflation, prices are falling. Everything is logical and clear.

I think many underestimate this indicator. When you see that GDP grew by 5%, it’s not always clear whether it’s a real economic growth or just inflation doing its job. That’s where the GDP deflator comes in — it provides a real picture of what’s happening. Sometimes it’s worth digging deeper into such things.