Q:

How do you calculate inflation rate using GDP deflator?

A:

Quick Answer

The inflation rate calculated with the help of the gross domestic product, or GDP, deflator uses the price index that indicates how much of the GDP has changed in the previous year is based on changes in the price level. The GDP deflator is a measure of price inflation and varies on a yearly basis.

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Full Answer

The GDP deflator measures price inflation by dividing the nominal GDP by the real GDP, and then multiplying that figure by 100. The result is a measure of an economy's inflation or deflation.

  1. Find out the GDP deflator for the year of interest
  2. GDP deflators are reported each year by the government of every country. If not available, calculate it with the formula for GDP deflator. This is equal to division between the nominal GDP and the real GDP for a specific year. To calculate the inflation rate using GDP deflator for a certain year, the previous year's GDP is also required.
  3. Use the inflation calculation formula
  4. Use the values for the years of interest to calculate the inflation rate with the formula for GDP deflator inflation. The formula requires the division of the GDP of the previous year by the GDP deflator value of the year in question and subtracting one. The end result is the inflation rate for the given period expressed in percents.
  5. Compare the result with the inflation rate calculated using the Consumer Price Index
  6. The result should be similar but often not equal to the inflation rate calculated using the Consumer Price Index, or CPI, which is the preferred way to calculate the inflation in most countries.
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