Price Deflator

A deflator is used to convert data compiled over a period into prices prevailing at an earlier point in time. for example, the current price of a television can be deflated to what it would cost say three years ago.
GDP Deflator, on the other hand, is a comprehensive measure of inflation, implicitly derived from national accounts data as a ratio of GDP at current prices to constant prices. While it encompasses the entire spectrum of economic activities including services, it is available on a quarterly basis with a lag of two months since 1996. Essentially, a deflator removes the effect of inflation from data, making it comparable across periods.

What is the role of price deflator in GDP calculations? 
Prices are always in a state of flux, but generally move upwards over time. Therefore, a change in prices can give the impression of an increase in the gross domestic product (GDP -- a measure of national income) even without an increase in the quantity of goods and services produced by an economy. The impact of prices has to be removed to arrive at a true measure of economic growth. A deflator is used to restate output estimates at current prices into what they would be if calculated with reference to prices in an earlier year. This will give an idea of the real growth in the economy, minus the price effect.

Why is GDP deflator considered a good measure of inflation? 
The ratio between the GDP at current prices and GDP at constant prices gives an idea of the increase in prices of all goods and services with reference to the base year. In that sense it is a more comprehensive measure of inflation than price indices, which are based only on a limited basket of goods collected from select centres. However, the deflator comes with a lag, which limits its usefulness.

How is it used in India? 
In India a combination of WPI and CPI is used as deflator. The usage is dependent on the particular estimate we are trying to deflate. There will be different deflators for private consumption and government consumption. There is a difference in the value of quarterly and year-end deflators. This is due to the fact that prices are not constant. At the year-end we have an overall measure of WPI/CPI, which is used appropriately. This is why year-end estimates of GDP are more reliable than quarterly estimates.

Source: Economic Times, RBI