Question

3. Explain the differences and similarities between the GDP deflator and the CPI. Be thorough in your answer and write in complete sentences.

4. What is Hyperinflation and what are some reasons it may occur and persist? What is deflation, when does deflation usually occur, and is deflation a good or bad thing? Give examples of when each scenario happened in history as well. Again, be thorough in your answer.

Answer 1

3) Although CPI and GDP Deflator measure the same thing, there are key differences:

First that GDP Deflator includes only domestic goods and not anything that is imported, whereas CPI includes anything bought by consumers including foreign goods.

Secondly GDP Deflator is a measure of the prices of all goods and services while the CPI is a measure of only goods bought by consumers.

4) Hyperinflation is an extreme case of monetary devaluation that is so rapid and out of control that the normal concepts of value and prices are meaningless. The worst hyperinflation recorded was in Hungary in 1946 as a result of a requirement to pay reparations for the war that had just ended. Economists estimate that daily inflation rate during this period was around 200% , and thus prices doubled every 15 hours.

Deflation is general decline in prices of goods and services in an economy, which in turn increase the purchasing power of money. It is the opposite of inflation, but is not the same as disinflation ( which is slowing of inflation). A recent example of deflation occurred during " The Great Recession of 2007-08 where the inflation rate fell below 0% which means that the cost of goods and services were declining.