deflator

A deflator is an index used to remove the effects of price changes from nominal economic measures, allowing them to be expressed in real terms. It serves to adjust for inflation or deflation so that comparisons across time reflect changes in quantities rather than prices.

The most common example is the GDP deflator, the broad price index used in national accounts. It covers all final goods and services produced domestically. Real GDP is obtained by dividing nominal GDP by the deflator (with the deflator typically expressed as an index where the base year is 100). The GDP deflator is calculated as 100 times nominal GDP divided by real GDP. Other deflators exist for specific aggregates, such as the personal consumption expenditures deflator or implicit price deflators for investment and government spending. Price indices based on different baskets, like Laspeyres or Paasche, can be used to construct deflators for particular series.

Deflators differ from consumer price indices in scope; a CPI reflects changes in a fixed basket of consumer goods and services, while a GDP deflator reflects price changes for all domestically produced final goods and services. Uses include measuring real growth, inflation-adjusted comparisons over time, and policy analysis. Limitations include sensitivity to changes in the composition of output and the chosen base year, which can affect the measured real values.