The GDP deflator is the ratio of the value of goods and services an economy produces in a particular year at current prices, to that, at prices prevailing during any other reference (base) year. GDP deflator = (Nominal GDP/Real GDP)*100 This ratio basically shows to what extent an increase in GDP in an economy has happened on account of higher prices, rather than increased output. Hence, it is a good measure of inflation. For example: if an economy has a nominal GDP of $100 billion and has a real GDP of $80 billion, the economy’s GDP price deflator can be calculated as ($100 billion / $80 billion) x 100, which equals to 125. This means that the aggregate level of prices have increased by 25 percent from the base year to the current year. Other than GDP deflator, there are various indices such as Wholesale Price Index (WPI), Consumer Price Index (CPI), Producer Price Index (PPI), Commodity Price Index, Cost of Living Index, Capital Goods Price Index etc. that are used to measure inflation. But WPI and CPI are widely used indices to calculate inflation all over the world.

Differences between the GDP deflator, CPI and WPI are as follows:

• The GDP deflator covers the entire range of goods and services produced in the economy as against the fixed and limited commodity baskets for the WPI (no representation of the services sector) or CPI (based on only a basket of selected goods and services).
• Changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator because it includes a ‘changing basket’. CPI reflects changes to a consumer’s cost of living and WPI captures price changes at the factory/wholesale level, but they do not reflect new expenditure patterns because of the ‘fixed basket’.
• GDP deflator includes only those goods which are produced domestically. Imported goods do not form the part of GDP and hence are not reflected in the GDP deflator. While both WPI and CPI consider import in their calculations.
• GDP deflator is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month. This is the another reason behind using CPI/WPI rather than GDP deflator.

In India, WPI was used as a key measure of inflation for a long time, but now CPI is ation for being used for the same, as it covers services and also measures inflation from consumers’ end instead of manufacturers’ end.