THE GDP DEFLATOR VERSUS THE CONSUMER PRICE INDEX

In the preceding chapter, we examined another measure of the overall level of prices in the economy the GDP deflator. The GDP deflator is the ratio of nominal GDP to real GDP. Because nominal GDP is current output valued at current prices and real GDP is current output valued at base-year prices, the GDP deflator reflects the current level of prices relative to the level of prices in the base year. Economists and policymakers monitor both the GDP deflator and the consumer price index to In the preceding chapter, we examined another measure of the overall level of prices in the economy-the GDP deflator. The GDP deflator is the ratio of nominal GDP to real GDP. Because nominal GDP is current output valued at current prices and real GDP is current output valued at base-year prices, the GDP deflator reflects the current level of prices relative to the level of prices in the base year. Economists and policymakers monitor both the GDP deflator and the consumer price index to gauge r-ow quickly prices are rising. Usually, these two statistics tell a similar story. Yet Tharp are two important differences that can cause them to diverge The first difference is that the GDP deflator reflects the prices of all goods and services produced domestically, whereas the consumer price index reflects the prices of all goods and services bought by consumers. For example, suppose that the price of an airplane produced by Boeing and sold to the Air
Force rises. Even though the plane is part of GDP, it is not part of the basket of goods and services bought by a typical consumer. Thus, the price increase shows up in the GDP deflator but not in the consumer price index.r-ow quickly prices are rising. Usually, these two statistics tell a similar story. Yet Tharp are two important differences that can cause them to diverge
The first difference is that the GDP deflator reflects the prices of all goods and services produced domestically, whereas the consumer price index reflects the prices of all goods and services bought by consumers. For example, suppose that the price of an airplane produced by Boeing and sold to the Air Force rises. Even though the plane is part of GDP, it is not part of the basket of goods and services bought by a typical consumer. Thus, the price increase shows up in the GDP deflator but not in the consumer price index.

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