Question

INSTRUCTIONS: DEFINE THE FOLLOWING TERMS AND CONCEPTS IN A CLEAR, CONCISE, AND EXPLICIT WAY. DEMONSTRATE THE RELATIONS BETWEEN THEM!

a)GDP deflator & Consumer Price Index (CPI).

b)Okun's law & Philips Curve.

Answer 1

a) Consumer price index(CPI)- CPI measures weighted average or prices of consumers' basket taking price changes of each item in predetermined basket and averaging them. CPI measures cost of living faced by the consumer of a nation.

GDP deflator- It is a measure of the prices of all final goods and services produced within the economy.

GDP deflator=(nominal GDP/real GDP)*100

The relation between CPI and GDP deflator is both the measures compare the current year's price level to the base year. Both are used to measure the inflation rate.

b) Okun's law- This law states that 1% increase in the cyclical unemployment is associated with 2% decrease in real GDP.

Philips curve- This curve shows the existence of a stable and inverse relationship between inflation and unemployment. It shows a trade-off between inflation and unemployment. According to this theory, when there is an economic growth, comes inflation which leads to more jobs and less unemployment.

The relation between Okun's law and Phillips curve is that both shows a tradeoff between economic growth and unemployment rate.