# Understanding the gdp deflator the gdp deflator is a

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Understanding the GDP deflatorThe GDP deflator is a weighted average of prices. The weight on each price reflects that good’s relative importance in GDP. Note that the weights change over time.32tttNGDPGDP deflatorRGDP1t1t2t2t3t3ttP QP QP QRGDP1t2t3t1t2t3ttttQQQPPPRGDPRGDPRGDP
The Consumer Price IndexConsumer price index (CPI)Measures the typical consumer’s cost of livingBy Bureau of Labor Statistics, usagestracks changes in the typical household’s cost of livingadjusts many payments (or contracts) for inflation (“COLAs”:: cost of living adjustments)allows comparisons of dollar amounts over time35
Calculating CPI4.Chose a base year and compute the CPI5.Compute the inflation rate381001yearinCPI1yearinCPI-2yearinCPI2yearinrateInflationCost of basket in that monthCost of basket in base period100
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Fix a basket of goods!!!!Problems in measuring the cost of livingSubstitution bias倾向fixed weights, cannot reflect substitution toward cheaper goodsIntroduction of new goodsmakes consumers better offincreases the real value of the dollarUnmeasured quality changeincrease the value of the dollar41
CPI vs. GDP DeflatorPrices of capital goods:included in GDP deflator (if produced domestically)excluded from CPIPrices of imported consumer goods:included in CPIexcluded from GDP deflatorThe basket of goods:CPI: fixedGDP deflator: changes every year44