Question

Is it possible that CPI increases but GDP deflator decreases? Explain.

Answer 1

The GDP price deflator takes into account a given economy's nominal GDP as well as its actual GDP. The nominal GDP represents the value of the finished goods and services produced by an economy, unadjusted for inflation, while the actual GDP represents the value of the finished goods and services produced by an economy, adjusted for inflation. Hence if inflation were not involved, the nominal GDP would be equal to the actual GDP. The GDP price inflator measures the effect of inflation on the finished goods and items by translating the production of an economy into current prices, thereby illustrating the influence of inflation on the increase in GDP.

Alternate inflation indexes in the US economy are the CPI and the GDP price index and the implied price deflator. The choice to use in a given situation generally depends on the set of goods and services one is interested in as a measure of price change. The CPI calculates market increases from an urban consumer's perspective and thus pertains to products and services that urban consumers buy out of pocket. The GDP price index and implicit price deflator assess price adjustments from the viewpoint of domestic products and services output and thus apply to goods and services purchased by, but not importers, customers, companies, government and foreigners.

What CPI will clearly define are cycles of inflation or deflation in its everyday living expenses for consumers. If inflation is present when goods and services cost more the CPI will increase over a short period of time , say six to eight months.When the CPI decreases, this means there is deflation, or a gradual fall in goods and services costs.