Because there isn\'t one single measure of inflation, the government and researc

Question

Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator.

The GDP deflator for this year is calculated by dividing thevalue of all goods and services produced in the economy this year Correct usingthis year’s prices Correct by thevalue of all goods and services produced in the economy this year Correct usingthe base year’s prices Correct and multiplying by 100. The CPI, on the other hand, reflects only the prices of all goods and servicesbought by consumers Correct .

Explanation / Answer

While using GDP deflator as a toll of measuring inflation, we require nominal GDP and real GDP as well. Where nominal GDP measures value of all goods and services of current year with the prices of current year, real gdp measures value of all current year goods and services with base year price.

These two GDP then becomes aratio and then get multiplied with 100.

Thus GDP deflator = Nominal GDP/Real GDP * 100

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