GDP Deflator

GDP uses market prices as measure sticks, which has many drawbacks:

• Prices may not exist, e.g. government revenue, which is assumed to be equal to cost
• Prices may not be a good yardstick, e.g. monopoly prices
• Prices can change over time

Solution: fix the price in an arbitrary base year.

• Implicit GDP Deflator = Nominal GDP / Real GDP × 100
• Chain-weighted GDP deflators
• Inflation rate = growth factor of GDP deflator − 1 = growth rate of GDP deflator

Underestimation of real GDP growth means overestimation of inflation, and vice versa.