Question

In the year 2000, the CPI was 172.2 and the GDP deflator was 78.7. In 2018, the CPI had risen to 251.6 and the GDP deflator to 111.3.

a. How much did prices increase from 2000 to 2018 according to the CPI and how much according to the GDP deflator? Why is there a difference?

b. If the price of a 12oz can of Coke was $1.25 in 2000 and the price was $1.75 in 2018, did the real price of Coke go up, down, or stay the same? Explain your answer.

Answer 1

a. Price increase according to CPI = 251.6/172.2 - 1 = 46.11%

Price increase according to GDP deflator = 111.3 / 78.7 - 1 =  41.42%

The two would give different results because they are made up of different items. While CPI is made up of a standard basket of goods, GDP deflator is more broad-based.

b. Nominal price increase in Coke can = 1.75 / 1.25 - 1 = 40%

Since CPI has gone up by 46.11% whereas Coke can only by 40%, the real price of Coke can has come down.