In: Economics
1. Inflation can be defined as the general rise in price of goods and services during a specific period, usually one year. Inflation can be calculated using GDP deflator and CPI. However, the inflation rate so calculated is different in both methods.
GDP deflator takes into account all the final goods and services produced in the geographical boundaries of a country whereas the CPI considers only a fixed basket of goods and services that are predominantly consumed by the people. Thus GDP deflator excludes imports and includes exports whereas CPI may include import and excludes export.
For country Alpha, the inflation based on GDP deflator will be different than inflation based on the CPI. This is because most of the goods and services are exported (export oriented economy) and exported items are included in GDP deflator but not in CPI.
For country Beta, the inflation based on GDP deflator will be different than inflation based on the CPI. This is because although country is self sufficient i.e. there is no import and export, all goods and services are included in for calculation of GDP deflator but only specific goods and services are included for calculation of CPI.