Answer to Question #87500 in Macroeconomics for James Alphonce

Question

what is the GDP deflator,and how does it differ from the consumer and producer price indexes?under what circumstances might it be a more useful measure of price than CPI and PPI?

Answer 1

The GDP deflator is a measure of all goods and services produced in domestic peripheries of a nation. The index is calculated as a ratio of nominal GDP to real GDP multiplied by 100.

     The Consumer Price Index or CPI is the ratio of cost of representative basket of goods in the current year to the cost of same basket of goods in the chosen base year multiplied by 100.

The Producer Price Index or PPI is the index of average prices of the goods and services received by producers which are produced domestically irrespective of what consumers are willing to pay. It is calculated as prices received by the producers of a representative basket of goods in the current year to the prices of same basket of goods in the chosen base year multiplied by 100.

GDP DEFLATOR IS MORE USEFUL IN FOLLOWING CIRCUMSTANCES

Having mentioned about the procedures to work out the three Indices GDP deflator is better suited when one needs to study the changing patterns of consumption as well as production in an economy. Since the CPI reflects only the consumption side and PPI only reflects the suppliers side. Moreover, GDP deflator is more useful when the motive is to assess the movement of prices of goods and services across the whole economy which are domestically produced. The CPI does not take into account the government sector as far as consumption is concerned, it will be more beneficial to use GDP deflator when one needs to take into account the government sector. Finally, GDP deflator is more relevant when one wants to know about the changing composition of GDP.