What is the main purpose of the GDP deflator?

The GDP deflator is primarily used to measure inflation by reflecting the change in prices of all goods and services included in the Gross Domestic Product (GDP). It captures the price level changes within the economy that affect the nominal GDP. Essentially, the GDP deflator is calculated by taking the ratio of nominal GDP to real GDP and then multiplying by 100, which allows economists to see how much of the growth in GDP is attributable to increases in prices rather than an increase in the actual output of the economy.

This measure is particularly important because it encompasses a broader range of goods and services compared to other inflation measures, such as the Consumer Price Index (CPI), which focuses only on a fixed basket of consumer goods. By providing a comprehensive overview of price changes across the economy, the GDP deflator becomes a crucial tool for policymakers and economists when analyzing inflation trends and their implications for economic policy.