Business, 13.03.2021 01:30 nerual0503

Both the CPI and the GDP deflator measure changes in the prices of goods and services and tend to change in similar ways over time. In the third quarter of 2018, the CPI rose by 1.5% from the previous quarter, while the GDP deflator rose by only 0.7% over the same period. What might explain the difference? Changes in the GDP deflator reflect changes in the prices of all domestically‑produced goods and services—and so may understate inflation. Changes in the CPI, on the other hand, reflect changes in the prices of the goods and services in the fixed basket. Changes in the CPI reflect changes in the prices of the goods and services in the fixed basket—and so may overstate inflation. Changes in the GDP deflator, however, reflect changes in the prices all domestically‑produced goods and services. The CPI is a price index and so more accurately captures true inflation, whereas the GDP deflator captures not only price increases but increases in real output. The greater increase in the CPI thus implies that real output rose more slowly than the price level. The CPI is a pure price index and thus accurately captures inflation. The GDP deflator is weighted by the market value of the total consumption of each domestically‑produced good and service. As a result, the GDP deflator understates changes in the cost of living.

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Both the CPI and the GDP deflator measure changes in the prices of goods and services and tend to ch...

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