How is the GDP deflator calculated?

The GDP deflator is a measure of the price level that reflects how much nominal GDP is altered by changes in price levels compared to real GDP. It is calculated by taking the ratio of nominal GDP to real GDP and then multiplying by 100. This calculation effectively indicates how much prices have changed in the economy since the base year used to calculate real GDP.

When nominal GDP rises, it could be due to either increased production of goods and services or an overall increase in price levels. By dividing nominal GDP by real GDP, we isolate the impact of price changes from changes in actual output. This is what allows the GDP deflator to serve as a comprehensive measure of inflation within the economy—showing how much of the change in nominal output is due to changes in prices rather than changes in real output.

In contrast, other options do not correctly reflect the mathematical relationship needed to derive the GDP deflator, as they either misrepresent the needed arithmetic operations or use the relationship between nominal and real GDP incorrectly. Thus, the proper formulation provides clarity in understanding how inflationary pressures manifest in the overall economic output as measured by GDP.