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GDP Deflator Vs Cpi

This document discusses the GDP deflator and the Consumer Price Index (CPI). It defines the GDP deflator as a measure of inflation that allows the goods and services in the economy to change over time, while the CPI measures inflation based on a fixed basket of goods and services. The document also provides the formulas and steps for calculating both the GDP deflator and CPI. Finally, it summarizes some of the key differences between the two measures, such as how the GDP deflator only includes domestic goods while the CPI also considers imported consumer goods.

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Ali Hasan
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178 views6 pages

GDP Deflator Vs Cpi

This document discusses the GDP deflator and the Consumer Price Index (CPI). It defines the GDP deflator as a measure of inflation that allows the goods and services in the economy to change over time, while the CPI measures inflation based on a fixed basket of goods and services. The document also provides the formulas and steps for calculating both the GDP deflator and CPI. Finally, it summarizes some of the key differences between the two measures, such as how the GDP deflator only includes domestic goods while the CPI also considers imported consumer goods.

Uploaded by

Ali Hasan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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SUBMITTED TO: PROF.

MUHAMMAD AFZAL

SUBMITTED BY: ALI HASAN


ROLL NO.

2009-13

1st SEMESTER

MBA MORNING
INSTITUTE OF BUSINESS ADMINISTRATION UNIVERSITY OF THE PUNJAB LAHORE

GDP Deflator vs. CPI

MBA Morning

GDP Deflator
1. Definition:
The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period. The GDP deflator is not based on a fixed market basket of goods and services. The basket is allowed to change with people's consumption and investment patterns. Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices.

2. Calculation:
Steps involved for calculating GDP Deflator: Step1: Choose a country or region to study Choose a country or a region that you wish to study and learn more about its gross domestic product. Step 2: Find the nominal GDP Find the nominal GDP for your chosen region. The nominal GDP is the countrys gross domestic product measured at todays market prices. Step 3: Select a base year you wish to compare Select a base year that you will use for comparison to the current gross domestic product. Step 4: Get the real GDP for your base year Get the real GDP measurement for your country. The real GDP is the gross domestic product of your country, measured in dollars from your base year.

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GDP Deflator vs. CPI Step 5: Divide nominal GDP by real GDP, multiply by 100

MBA Morning

Divide the nominal GDP by the real GDP. Multiply this total by 100 to find the GDP deflator. Step 6: Interpret the GDP deflator Interpret the GDP deflator. Think of it as the ratio of todays prices to those of your base year. A deflator of 200 means that the current years GDP is twice that of the base year, signaling inflation.

Formula:

Essentially, the GDP deflator compares the price level in the current year to level in the base year.

3. Uses of GDP Deflator:


The GDP price deflator has two common uses: 1. as an indicator of the price level and economic activity and 2. as a method of deflating nominal economic indicators to real terms. Since inflation changes from year to year, and a nations productivity level over time is tracked in monetary terms using GDP, how can you tell if a change in a country's level of output is due to a real change in productivity or whether it is due to fluctuations in the level of the prices of that output? The answer is you can't. you can not accurately compare a country's GDP from year to year. To deal with this issue, a "fudge factor" called the GDP deflator is used to convert Nominal GDP (GDP with the effects of inflation) into Real GDP (GDP without the effects of inflation). Nominal GDP is divided by the GDP deflator to get Real GDP. Basically, the GDP deflator is used to "cancel out" the effects of inflation.

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GDP Deflator vs. CPI

MBA Morning

Consumer Price Index (CPI)


1. Definition:
A consumer price index (CPI) is a measure estimating the average price of consumer goods and services purchased by households. A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same area.

2. Calculation
1. Step 1: Determine the goods and the time frame for which you are interested in measuring the inflation rate. People often want to know how prices have increased over the period of 1 year. Suppose that you are interested in the inflation rate for a basket of goods that includes a gallon of milk, a loaf of bread and a paperback novel. 2. Step 2: Calculate the number of units you purchase of these goods and the prices you paid 1 year ago. For example, suppose you buy 4 gallons of milk, 3 loaves of bread and a paperback per month and that 1 year ago, you paid the following prices: $2.75 per gallon, $2 per loaf, and $7 per novel. This means that you spent a total of $24 a month 1 year ago for these goods. 3. Step 3: Repeat step 2, but this time consider the prices you pay now. Suppose the current prices are $3.50 for a gallon of milk, $2.50 for a loaf of bread, and that the price of a paperback is the same $7. This means that you now spend $28.50 a month for the same basket of items.

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GDP Deflator vs. CPI 4. Step 4:

MBA Morning

Subtract the amount you spent per month one year ago ($24) from the amount you spend now ($28.50). Then take the difference ($4.50) and divide by last year's amount ($24). This gives you a result of 0.188 (with rounding). 5. Step 5: Multiply the result you obtained in step 3 (0.188) by 100 to obtain the percentage rate increase for the selection of goods you're interested in studying. For this example, the results show that the consumer price index for a gallon of milk, a loaf of bread and a paperback novel increased 18.8 percent in the past year.

FORMULA

4. Uses of CPI:
The CPI is the most commonly used measure of inflation. It is also used for a wide variety of other purposes such as: - wage negotiations - indexing pensions and social security benefits - indexing other payments such as interest payments or rents - formulation of the monetary and fiscal policies of government. You can use the CPI to convert an entire series of prices to constant dollars

5. GDP Deflator vs. CPI (Summary):


1. The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket. 2. GDP deflator frequently changes weights while CPI is revised very infrequently.

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GDP Deflator vs. CPI

MBA Morning

3. CPI will consider imported goods because they are still considered as consumer goods while GDP deflator will only contain prices of domestic goods.

REFERENCES
http://www.differencebetween.net/business/finance-business-2/differencebetween-cpi-and-gdp-deflator/ http://en.wikipedia.org/wiki/GDP_Deflator http://www.howcast.com/videos/290361-How-To-Calculate-GDP-Deflator http://www.econport.org/content/handbook/Inflation/GDPdeflator.html www.gov.mu/portal/goc/cso/hbs/pamp.doc

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