# What is the difference between how the GDP deflator is calculated vs the CPI?

## What is the difference between how the GDP deflator is calculated vs the CPI?

The CPI measures price changes in goods and services purchased out of pocket by urban consumers, whereas the GDP price index and implicit price deflator measure price changes in goods and services purchased by consumers, businesses, government, and foreigners, but not importers.

How do you calculate GDP deflator from CPI?

The formula is Nominal/CPI x 100. So a Television that cost \$100 in 2017 would cost \$70.59 (\$100/141.67=\$70.59) in 1990. To calculate the amount of inflation between two deflators or CPIs, you can use the formula for calculating percentage change. That formula is (new-old)/old x 100.

### How do you calculate real GDP from CPI?

However, to determine real GDP, the nominal GDP is divided by the price index divided by 100. To simplify comparisons, the value of the price index is set at 100 for the base year. Previous to the base year, prices were generally lower, so those GDP values must be inflated to compare them to the base year.

What are the three major differences between CPI and GDP deflator?

The GDP deflator measures a changing basket of commodities while CPI always indicates the price of a fixed representative basket. 2. GDP deflator frequently changes weights while CPI is revised very infrequently. 3.

#### Can CPI be used as GDP deflator?

Since GDP isn’t based on a fixed basket of goods and services, the GDP deflator has an advantage over the CPI. For instance, changes in consumption patterns or the introduction of new goods and services are automatically reflected in the GDP deflator but not in the CPI.

What is real exchange rate and nominal exchange rate?

real exchange rate: The purchasing power of a currency relative to another at current exchange rates and prices. nominal exchange rate: The amount of currency you can receive in exchange for another currency.

## Why does the GDP deflator give a different rate of inflation than does the CPI?

– The GDP deflator gives a different rate of inflation than the CPI because CPI is about consumption while GDP is about production. CPI counts US citizens consuming foreign produced goods and does not subtract it the way GDP does. Also, GDP counts capital goods while CPI does not.

What is the difference between the CPI and GDP price deflator?

The CPI measures price changes in goods and services purchased out of pocket by urban consumers, whereas the GDP price index and implicit price deflator measure price changes in goods and services purchased by consumers, businesses, government, and foreigners, but not importers. Thus, which one to use in a given scenario depends on one’s purpose.

### What is the formula for calculating the GDP deflator?

To calculate the GDP deflator, the formula is Nominal/Real x 100. In the example above the GDP Deflator for 1980 is 100 (\$500/\$500 x 100 = 100). The GDP deflator for the base year is always 100.

Is the GDP deflator a Paasche index?

By contrast, the GDP deflator is a Paasche index, it understates the impact on consumers: the GDP deflator shows no rise in prices, yet surely the high price of orange makes consumer’s worse off.

#### Why is GDP a more up to date determinant of inflation?

It is much broader in scope than CPI because in addition to looking at how consumers have changed their buying habits and the changes in prices, it looks at all the goods produced in a time period and the market value of these goods. In this way, the GDP is a more up to date determinant of inflation.