Economy > Economic growth > Inflation > GDP deflator: Group totals

DEFINITION: The GDP deflator is an implicit, not an explicit deflator. It is derived by dividing an index of GDP measured in current prices by a chain volume index of GDP (see Evolution of GDP), both, typically. derived using the expenditure approach (see Size of GDP). It is therefore a weighted average of the price indices of:

goods and services consumed by households;

expenditure by government on goods, services and salaries;

fixed capital assets;

changes in inventories;

exports of goods and services;

imports of goods and services (minus).

While the CPI measures the price changes of goods and services consumed by households, the GDP deflator measures the price changes of goods and services produced by a country, including exports, and also includes a component to reflect price changes in imports. Hence, the treatment of exports and imports merits special attention. The GDP deflator will go up, indicating more inflation, if the prices of exports rise but although higher inflation is usually thought of as a bad thing, it may actually be beneficial to a country if the prices of its exports rise, since it is non-residents who pay the higher prices; although this may be coupled with a fall in the value of the country’s currency. Conversely, price rises in imports will reduce the GDP deflator, although, following the same reasoning this may not necessarily be a good thing for residents.