Recently the GDP fiasco was blamed on the use of improper deflators, here’s an explanation that would help you understand it better
What is a 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. Essentially a deflator removes the effect of inflation from data, making it comparable across periods.
How is it used in India?
In India a combination of Wholesale Price Index (WPI) and Consumer Price Index (CPI) is used as deflator. The usage is dependent on a particular estimate we are trying to deflate. There would be different deflators for private consumption and government consumption. There is a difference in quarterly and year-end deflators; this is due to the fact that prices are not constant. At the yearend we have an overall measure of WPI/CPI which is used appropriately. This is why year-end estimates of GDP are more reliable that quarterly estimates.
Source: ET
