Question

Briefly explain the difference between Consumer Price Index and the GDP Deflator. Describe in your own words; you can include an exposition of the formula of each, if you wish.

Suppose the CPI in 2016, 2017, 2018 and 2019 are 100 and 110, 115 and 130 respectively. What is the inflation rate between 2016 and 2017, and between 2017 and 2018? How would you interpret the change in inflation rates between 2016 and 2018?

Answer 1

GDP deflator and CPI both used to calculate inflation in the country. But they have some difference in calculation. GDP deflator considers the goods & service which is produce by within the domestic territory while the CPI include all the goods & service consume by the consumers irrespective of national & international. In GDP deflator, the weight of basket changing depends upon the market value. But CPI measures the price of fixed representative baskets. CPI inflation is used to measure the living standard of the people where as GDP deflator used the compare the nominal GDP & real GDP.

Formula                                                                                                                                

   GDP Deflator = (Nominal GDP/Real GDP) x 100                                                            

CPI = (Price of basket in current year/price of basket in base year) *100

Inflation rate =(CPI current –CPI previous/ CPI previous) *100

Inflation rate between 2016 and 2017 = (110-100/100)*100= 10

Inflation rate between 2017 and 2018= (115-110/110)*100= 4.54

Inflation rates between 2016 and 2018= (115-100/100)*100= 15. The inflation rate between 2016 to 2018 is 15 which indicate that the price has 15% changes between the periods 2016 to 2018.