Question

The GDP deflator

Multiple Choice

• Is the best measure of inflation for consumers.

• Is the broadest price index, covering all output.

• Reflects the price changes felt by producers but not consumers.

• Is the price index based on a fixed basket of goods and services for the government.

Answer 1

The GDP deflator calculate the prices of all goods and services produced, while the CPI compute the prices of only the goods and services bought by consumers. The GDP deflator includes only those goods produced domestically while CPI may include imported goods also.

It means that GDP deflator reflects the price changes felt by producers but not consumers. This is because this reckons the prices of goods and services produced by producers while CPI reckons the prices of only the goods and services bought by the consumers.

Inflation rate between Year 1 and year 2 is

=[(GDP deflator year 2 - GDP deflator year 1)/ GDP deflator year 1]*100

Although GDP deflator is also used for reckoning the inflation but it is not best measure of inflation for consumers.

Hence it can be said that the GDP deflator reflects the price changes felt by producers but not consumers.

Hence option third is the correct answer.