We can measure the changes in prices of goods overtime by an index called GDP Deflator. GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100. The formula for GDP Deflator: GDP deflator.

Using the statistics on real GDP and nominal GDP, one can calculate an implicit index of the price level for the year. This index is called the GDP deflator and is given by the formula.

The GDP deflator can be viewed as a conversion factor that transforms real GDP into nominal GDP. Note that in the base year, real GDP is by definition equal to nominal GDP so that the GDP deflator in the base year is always equal to 100.

Calculating the rate of inflation or deflation.

Suppose, that in the year following the base year, the GDP deflator is equal to 110. The percentage change in the GDP deflator from the previous (base) year is obtained using the same formula used to calculate the growth rate of GDP. This percentage change is found to be 10%, implying that the GDP deflator index has increased by 10%.

Another way of describing this finding would be to say that the inflation rate in the year following the base year was 10%. More generally, if the percentage change in the GDP deflator over some period is a positive X%, then the rate of inflation over the same period is X%. If the percentage change in the GDP deflator over some period is a negative X%, then the rate of deflation over that period is X%.