Question

Problem 6

Explain the difference between CPI and GDP deflator

Answer 1

The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket.

GDP deflator frequently changes weights while CPI is revised very infrequently.

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

In general

GDP Deflator :
- fixed prices or constant prices
- produced domestically goods are included
- any component of GDP
- any Goods and services produced in US

CPI
- fixed quantity
- purchased by consumers
- C component of GDP
- Goods and services consumed by households in US - regardless of if they are produced in the US