Final answer:
The GDP deflator is calculated using the formula: GDP Deflator = (Nominal GDP / Real GDP) x 100. It adjusts nominal GDP for price changes, providing a measure of the price levels in an economy. The correct answer is d) price levels.
Step-by-step explanation:
The GDP deflator is a broad measure of the price level of all goods and services included in the economy. It is calculated using the following equation:
GDP Deflator = (Nominal GDP / Real GDP) x 100
Where nominal GDP represents the total value of all goods and services produced at current prices, and real GDP is adjusted to reflect the change in price levels. To further understand this concept, consider that if nominal GDP increases due to inflation rather than an actual increase in output, the GDP deflator helps to distinguish this by adjusting for price changes. Hence, the GDP deflator measures changes in the price level, which is depicted graphically in various figures such as Figure 2, 5.8, and 19.8, and tabulated in data tables such as Table 2, 5.5, 6.5, and 19.5 provided in economic texts. Answering the multiple choice question, the GDP deflator measures d) price levels, and not a) national output, b) national income, or c) income changes.