First, the GDP deflator includes all the goods and services produced within the borders of a country, in our narrative, Dateland.

However, the GDP deflator does not take goods and services imported into account.

If, for example, there has been no change in prices of goods and services produced in Dateland in a year but significant increases in prices of goods and services imported in the same period, GDP deflator will not change, i.e., it will have the same index number at the beginning of the year and at the end of the year.

Thus, it will fail to capture the increase in the cost of living caused by price hikes in imported goods and services

Second, not all goods counted in GDP are consumed by the citizens of Dateland. If, for example, Dateland is producing firetrucks, a citizen of Dateland most probably will not consume this good.

As a result, even if the price of a firetruck declines this year (assuming that prices of all other goods and services do not change), a typical Dateland citizen’s (Datelander) cost of living will not be affected by this change even though a measurement done by using the GDP deflators at the beginning and the end of the year indicate a decline in the overall price level.

Third, one can consider the GDP deflator as the price of a gigantic basket including all the goods and services produced within the borders of Dateland. The value proportion of each good (or each service) in this basket most probably would not be the same as the value proportion of that good in a typical Datelander’s consumption basket. For example, in Dateland, only 1% of its GDP, in a given year, consists of dairy products, whereas a typical Datelander’s annual budget, dairy products might constitute 20% of the spending. Thus, the effect of an increase in the prices of dairy products on the cost of living would be underestimated by the change measured by using the GDP deflator.