I just learned about the GDP deflator index and want to share it with everyone because it’s really useful for understanding the economy.

Put simply, the deflator index is a way for us to know how the prices of goods and services in a country have changed over time. It helps us distinguish whether the GDP growth is due to actual production increasing, or whether it’s only because prices have gone up.

The way it works isn’t complicated either. The deflator index compares two figures: nominal GDP ( calculated at current prices ) with real GDP ( calculated at the prices of a base year ). The difference between the two shows the extent of price changes in the economy.

The calculation formula is also easy: the GDP deflator index equals ( nominal GDP divided by real GDP ) times 100. Then, to know by how many percentage points prices have increased or decreased, we subtract the result by 100.

When it comes to interpreting the result, there are three cases. If the GDP deflator is 100, prices do not change compared to the base year. If it’s greater than 100, prices have increased (, which is called inflation ). If it’s less than 100, prices have decreased (, which is called deflation ).

Let me give an example to make it easier to understand. Suppose that in 2024, a country’s nominal GDP is 1.1 trillion USD, while its real GDP ( calculated at 2023 prices ) is 1 trillion USD. Then the GDP deflator index will be 110. This means that overall prices have increased by 10% compared to 2023.

The great thing about the GDP deflator index is that it gives us a clearer view of the real economy. Instead of just looking at GDP increasing without knowing whether it’s because production increased or because prices increased, we can separate those two factors. That’s why economists often use the GDP deflator index to analyze.