Macro Economics As the percentage change in the GDP deflator and inflation are both measures of...

Macro Economics

As the percentage change in the GDP deflator and inflation are both measures of changes in price levels, what is there a difference between them. with help pg graph

Solutions

Expert Solution

GDP deflator: (Nominal GDP / Real GDP) x 100

The percentage change in GDP deflator from one period to another is used to signify inflation.

Whereas, Consumer Price index (used to measure inflation): It measures the change in price of fixed basket of consumer products over a period of time. The percentage change in CPI from one period to another period is measure inflation.

Both are important measures to calculate an increase in price level.

Common difference points between them:

GDP deflator measures a changing basket of goods whereas CPI always measures the change in price level of fixed basket of consumer goods and services.
The weights in GDP deflator frequently changes whereas CPI has almost fixed weights.
CPI will provide the inflation for consumer related goods only whereas GDP deflator will contain the price of domestically produced goods.

I have uploaded a picture from the website: US Bureau of Labor Statistics, US Bureau of Economic Analysis.

It is showing the trend in both CPI and GDP deflator in US economy over a period of time.

Rahul Sunny answered 11 months ago

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