Imagine 2005 currency talking to 2015 currency.
2005 currency: You know i can buy double quantity of wheat, 1.5x gasoline & many more things compared to what you can buy.
2015 currency: That means, in term of wheat your purchasing power is double than mine.
2005 currency: Absolutely!
2015 currency: Things will not be same as always.
2005 currency: What do you mean ?
2015 currency: This will continue only when there will be inflation, If deflation starts, I will be the king. Your purchasing power will be lower than mine.
2005 currency: I see.
GDP deflator :
Example first : Say 2005 deflator is set to be 1 or 100. In 2010 value of deflator comes out 110.99 .
That means 110.99 (For 2010) : 100 (For 2005) = 1.1099 (For 2010) : 1 (For 2005)
In simplest word it means to tell us, 2005 CURRENCY COULD BUY 1.10X MORE THAN 2010 CURRENCY or 10.99% more .
Another example : GDP deflator of 1950 = 14.65 & 2005 is 100.
14.65 (For 1950) : 100 (For 2010) = 1 : 6.82 .That tells us 1950 currency value could have purchase 6.82X or 682% more than 2010 value.
GDP deflator tells how much price rise is responsible for rise in GDP value.
Definition : GDP deflator is an economic indicator that tracks the cost of goods and services produced in an economy with respect to purchasing power of the currency of that economy.
Note: In WPI, we saw only goods price are considered and in CPI goods and services both price value is considered. But they both have confined basket.
Whereas in GDP deflator, both goods and service are considered as well as each number of goods and service that are produced domestically is considered. This makes GDP deflator the most original and comprehensive number to have an idea about Inflation.
For base year, GDP will be always at constant price (i.e adjusted for inflation), for current year GDP will be at current price, which means GDP number have effect of inflation or deflation.