Final answer:
The GDP deflator indicates changes in both the price levels and the real volume of goods and services produced, capturing both inflationary effects on the nominal GDP and changes in actual output to provide a clearer picture of economic growth.
Step-by-step explanation:
The changes in the GDP deflator reflect both changes in prices and changes in the amounts being produced. This is because the GDP deflator measures the ratio of nominal GDP to real GDP, capturing the price changes of goods and services included in GDP over time. Therefore, changes seen in the GDP deflator index are attributed to both the changes in price levels due to inflation or deflation, and changes in real output or the volume of goods and services produced.
Historical trends have shown that while nominal GDP can rise due to increases in prices or output, the GDP deflator adjusts nominal GDP to strip out the effects of inflation. This yields real GDP, a measure that approximates the value of goods and services produced, adjusting for changes in price levels and providing a more accurate reflection of economic growth.