The change in the GDP-deflator provides the most general measure of overall price change, taking into account changes in government costs, inventory appreciation, and investment expenditures. The GDP deflator reflects changes in prices for all final demand categories – government consumption, capital formation, international trade (exports & imports), as well as the ‘main’ component household consumption. The GDP deflator is usually implicitly derived as the ratio between GDP at current and constant prices.
Index formula
Changes in implicit deflators in the national accounts are often taken as measures of inflation. The implicit deflators being the ratio of current values to constant price values, and as such represent implicit Paasche price indices. Using Paasche indices to measure inflation between other periods is not valid, because the deflators – the Paasche indices – will reflect both price and volume changes, since volumes in each period are used as implicit weights.
Note! The only valid comparison of Paasche indices is between the base period and the current period.
A few countries apply Fisher price indices in their national accounts, and some construct additional Laspeyres price indices in order to estimate an overall price index that can compare inflation over time. – At present, there are less than a handful of countries at which this apply, the vast majority of countries construct implicit Paasche indices.
More about the GDP deflator can be found in ‘National Accounts, 5. Price and Volume Measures in the National Accounts’.
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