In macroeconomics, how is the 'GDP Deflator' calculated to measure overall price changes within a domestic economy?

💡 Solution & Explanation

The GDP deflator is a comprehensive price index calculated by taking nominal GDP at current year prices, dividing it by real GDP at base year prices, and multiplying the result by 100. Unlike fixed-basket indices, the GDP deflator allows the basket of goods to change with consumption and investment patterns over time. Other formulations invert these variables or mix different price indices entirely. It serves as a broad gauge of inflation across all domestically produced goods and services.