GDP Deflator & Inflation Calculator
Enter the raw economic output value without inflation adjustment.
Enter the economic output adjusted for price changes.
Use 100 to calculate inflation relative to the Base Year, or enter last year's deflator.
Please enter valid positive numbers for GDP values.
GDP Deflator (Current):
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Inflation Rate:
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Price Level Change:
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How to Calculate Inflation Rate Using Real and Nominal GDP
Understanding the relationship between Nominal GDP and Real GDP is fundamental to macroeconomics. By comparing these two metrics, economists derive the GDP Deflator, which is a comprehensive measure of inflation within an economy. Unlike the Consumer Price Index (CPI), which only looks at a basket of consumer goods, the GDP Deflator reflects the prices of all goods and services produced domestically.
The Formulas
To calculate the inflation rate using GDP figures, we perform a two-step calculation:
Step 1: Calculate GDP Deflator
GDP Deflator = (Nominal GDP / Real GDP) × 100
GDP Deflator = (Nominal GDP / Real GDP) × 100
Step 2: Calculate Inflation Rate
Inflation Rate = [(Current Deflator – Previous Deflator) / Previous Deflator] × 100
Inflation Rate = [(Current Deflator – Previous Deflator) / Previous Deflator] × 100
Definitions of Input Terms
- Nominal GDP: The market value of all final goods and services produced within a country in a given period, measured in current prices (not adjusted for inflation).
- Real GDP: The value of economic output adjusted for price changes (inflation or deflation). It represents the actual quantity of goods and services produced.
- GDP Deflator: An index number that represents the price level of all domestically produced goods and services. A value of 100 indicates the base year price level.
Practical Example
Let's assume an economy produces only widgets. In the base year, they produced 1,000 widgets at $10 each.
- Base Year: Nominal GDP = $10,000 | Real GDP = $10,000 | Deflator = 100
In the current year, the economy produces 1,000 widgets, but the price has risen to $12 each.
- Nominal GDP (Current): $12,000 (1,000 × $12)
- Real GDP (Current): $10,000 (1,000 × $10 base price)
Using the calculator above:
- Calculate Deflator: ($12,000 / $10,000) × 100 = 120.
- Calculate Inflation: [(120 – 100) / 100] × 100 = 20%.
This indicates that while output remained the same, the general price level increased by 20%.
Why Use the GDP Deflator?
While the CPI is more relevant for household cost-of-living adjustments, the GDP Deflator is preferred for:
- Measuring the price changes of all domestic production, including capital goods and government services.
- Adjusting payments in commercial contracts involving industrial goods.
- Analyzing the overall health of an economy by stripping away price effects to see true growth.