# GDP Deflator | Meaning and Formula

Last Updated : 02 Oct, 2023

## What is GDP or Gross Domestic Product ?

GDP or Gross Domestic Product is the total value of all the final goods and services produced within the domestic boundaries of a country during a year. It can be calculated at Market Price or Factor Cost. Gross in Gross Domestic Product means that the total value of final goods and services includes depreciation, i.e., no provision has been made for it. ‘Domestic’ in Gross Domestic Product means that the final goods and services produced are located within the domestic boundaries of the country. ‘Product’ in Gross Domestic Product indicates that only final goods and services are included. Market Price in GDP at MP means that the amount of indirect taxes paid is included in GDP; however, the subsidies are excluded from it. However, ‘Factor Cost in GDP at FC’ means that the gross total value of all the final goods and services is included.

GDP can be of two types: Real GDP and Nominal GDP. Real GDP is the Gross Domestic Product of a country of a given year, estimated on the basis of the price of the goods and services of a base year. However, Nominal GDP is the Gross Domestic Product of a country of a given year, estimated on the basis of the price of the goods and services of the same year. The formulas for calculating Real GDP and Nominal GDP are,

## What is GDP Deflator or Price Index?

The Real GDP of an economy is affected by any change in its physical output only. However, the Nominal GDP of an economy is affected by any change in its price and physical output both. For eliminating this effect of price change for the determination of the real change in the physical output of an economy, GDP Deflator is used. Hence, GDP Deflator measures the average price level of the goods and services of an economy that make up GDP.

The formula for calculating GDP Deflator is as follows:

Example:

Calculate the GDP Deflator of an economy if its Nominal and Real GDP are â‚¹15,000 and â‚¹10,000, respectively.

Solution:

= â‚¹150

GDP Deflator can also be used to convert Nominal GDP into Real GDP by using the formula as follows:

Just like GDP Deflator, an economy can also determine its GNP Deflator by using the formula as follows:

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