Answer to Question #87574 in Macroeconomics for mercy

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 the CPI and PPI?

Answer 1

The GDP deflator is a specific price index that shows how the change in price level affects the total cost of goods produced and services indicated (GDP) for a certain period of time. Calculated as the ratio:

$$GDP deflator=(Nominal GDP)/(Real GDP)*100$$

where Nominal GDP is a product of current volume of goods and services in current prices, Real GDP is a product of current volume of goods and services in basiс prices.

Consumer price index (CPI) is a price indicator that is used for a certain group of goods included in the food basket of one citizen of the country and calculated for a certain period of time. It represents the ratio of the consumer basket at current prices to the consumer basket at basic prices. Calculated as the ratio:

$$CPI=(CB cp / CB bp) * 100$$

where CBcp - is consumer basket in current prices, CBbp - is consumer basket in basic prices.

The producer price index is an indicator of the average level of price changes for raw materials and materials, as well as the intermediate consumption over the base period. This indicator covers all stages of production, as well as all sectors of the economy. Thus, characterizing how the purchasing power of the national currency and the level of costs in production are changed. It is important to note that this indicator only affects production in only wholesale prices without services.

The GDP deflator has advantages over the CPI and the CPI, namely: it takes into account the totality of goods and services, and not just their consumer part or intermediate; deals with current prices i. changed current prices. However, its main drawback is ignoring the impact of imports.