Answer to Question #179714 in Macroeconomics for Moosa Qaisar

Question

Compare GDP deflator with CPI.

Which of the two is a better measure of determining price fluctuations in your opinion?

Answer 1

The GDP deflator measures the prices of all goods and services produced, whereas the CPI measures the prices of only the goods and services bought by consumers. The GDP deflator gives a different rate of inflation than the CPI because CPI is about consumption while GDP is about production. CPI also uses a fixed basket while GDP uses a basket of currently produced goods and services.

In my opinion Since GDP isn't based on a fixed basket of goods and services, the GDP price deflator has an advantage over the CPI.