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A deflator is used to convert current dollars into dollars that are adjusted for price changes. Because price levels change over time, direct comparisons of output, wages, and other dollar-denominated measures are often meaningless. To usefully compare a salary of $50,000 in 1965 with a salary of $100,000 in 2005, a deflator must be used. Among the best known deflators is the GDP deflator, also known as the GDP implicit price deflator. The GDP deflator is a quarterly price index calculated by dividing GDP in some period by what the same GDP would have been in the base period. In other words, the GDP deflator is nominal GDP divided by real GDP. Some economists consider the GDP deflator superior to the consumer price index (CPI) as a measure of price change. While the CPI is based on a fixed basket of goods and services, the GDP deflator reflects naturally the introduction of new products and changing consumer habits. |
