Question

Describe a situation, either a government policy situation, an economic problem or private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.

Answer 1

CPI is realted to very small amount of goods that form a basket in the market, GDP deflator include all the goods in the market that are produced in the economy.

When the goods are large i.e. not regularly puchased by the household then it will be more approporiate to use the GDP deflator instead of CPI, for example for industrial grade machinery used to make steel and iron, production of defense equipments, expansion of infrastructure like making roads and bridges, building dams and hospitals etc.