Description:

The Gross Domestic Product is originally calculated in today’s dollars. However, because of inflationary effects on price levels, it is difficult to ascertain whether the GDP increase was attributed to an actual increase in goods and services or simply higher prices due to inflation. The GDP deflator attempts to account for this discrepancy.

Calculation:

The GDP deflator converts output measured in today’s prices to constant dollar terms. The GDP deflator isolates changes in price levels and shows how much of GDP is attributed to an increase in goods and services.