How is the GDP deflator defined?

• A. 100 times the ratio of nominal GDP to real GDP.
• B. The ratio of real GDP to nominal GDP.
• C. Is the same as CPI.
• D. Measures the price level of a specific market basket.

Answer: (A)

The GDP deflator is a price level index for all goods and services produced domestically, reflecting how overall prices change since the base year. It is defined as (nominal GDP / real GDP) × 100, so it converts nominal GDP into a measure that excludes quantity changes and isolates price changes. When the deflator rises above 100, overall prices have increased relative to the base year; if it’s 100, prices are the same as in the base year. This broad scope distinguishes it from the CPI, which tracks a fixed basket of consumer goods and services. The idea behind the ratio is that nominal GDP equals real GDP times the price level, so multiplying by 100 gives a convenient index of how prices have moved.