Differences between the two formulas? ● The key difference is the basket of goods that is being bought. ○ The GDP deflator studies the basket of goods that is produced domestically - meaning that it studies the basket of goods that represent the total production of the domestic economy ○ CPI studies the basket of consumer goods. The basket is constructed to reflect the types and quantities of goods that are purchased by a typical U.S. household. ○ GDP basket includes things that the household does not purchase, like coal fired power plants, locomotives, subway stations, city buses, aircraft carriers and nuclear submarines ○ The consumer basket includes things that households purchase but are not counted in GDP (i.e. imports). Inflation
- The percentage change in a price index ● Inflation rate in 2013 = Price index in 2013 - Price index in 2012 / Price index in 2012 ● There are two types of price indices, which are used to measure inflation: 1. GDP deflator 2. CPI ● As can be seen in the graph below, the choice of price index does not have a large impact on the resulting rate of inflation.
- Fall '10
- gross domestic product