Question

Explain the main difference between the CPI and the GDP Price Index.

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Answer 1

The first distinction is that the GDP deflator calculates the prices of all manufactured products and services, while the CPI or RPI only calculates the prices of the goods and services purchased by customers. A rise in the price of products purchased by companies or the government would thus appear in the GDP deflator but not in the CPI or RPI. The second distinction is that the GDP deflator only includes certain domestically manufactured products. Imported goods are not part of GDP, and do not appear in the deflator of GDP. For instance an increase in Toyota 's price made in Japan and sold in the UK. Affects the CPI or RPI because customers in the UK buy the Toyota but it does not affect the GDP deflator

The third distinction relates to how the two tests combine the various economic values. The CPI or RPI assigns fixed weights to the prices of the various items, while the GDP deflator assigns weights to adjust. In other words, the CPI or RPI is measured using a fixed commodity basket while the GDP deflator allows the commodity basket to adjust over time as the GDP composition shifts.

Unlike the CPI, the GDP price index tracks price changes for manufactured products and services but also calculates price increases for goods and services purchased by businesses , governments and foreigners. Like the CPI, however, the price index for GDP does not calculate price adjustments for imports.

The GDP price index is determined using a Fisher ideal index model, which is capable of capturing shifts in consumer expenditure allocation across the large categories of consumer products and services covered by GDP.

Alternative inflation measures in the US economy are the CPI and the GDP price index and the implicit price deflator. The alternative to use in a given situation generally depends on the set of goods and services one is interested in as a measure of price change. The CPI calculates price shifts from an urban consumer's perspective and thus pertains to products and services that urban consumers buy out of pocket. The GDP price index and implied price deflator calculate price adjustments from the viewpoint of domestic products and services output and thus apply to goods and services purchased by, but not importers, customers, companies, government and foreigners.