CHAPTER 23 MEASURING THE COST OF LIVING 519 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 con-sumer price index to gauge how quickly prices are rising. Usually, these two sta-tistics tell a similar story. Yet there 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
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