Deflator and Inflation Flashcards

If nominal GDP rises 8% and the GDP deflator rises 5%, what is the approximate real GDP growth rate?

Answer: 3%

Real GDP growth ≈ nominal GDP growth minus the GDP deflator growth rate, so 8% − 5% = 3%.

The GDP deflator for the current year is 125 and the base year is 100. By how much have prices risen since the base year?

Answer: 25%

A deflator of 125 relative to a base of 100 means prices have risen 25% since the base year.

Which of the following is NOT included in the GDP deflator's price index?

Answer: Imported consumer goods

The GDP deflator covers only domestically produced goods and services; imports are excluded because they are not part of GDP.

A country's nominal GDP is $2 trillion and the GDP deflator is 80. What is real GDP?

Answer: $2.5 trillion

Real GDP = (Nominal GDP / GDP Deflator) × 100 = ($2T / 80) × 100 = $2.5 trillion.

If the GDP deflator falls from one year to the next, this indicates:

Answer: Deflation in the overall economy

A falling GDP deflator means the overall price level of domestically produced goods and services has declined, which is deflation.

How does the GDP deflator differ from the CPI in terms of the basket of goods used?

Answer: The CPI uses a fixed basket; the GDP deflator uses a changing basket reflecting current output

The CPI tracks a fixed basket of consumer goods, while the GDP deflator's basket changes each period to reflect what is actually produced.

Which price index tends to show higher measured inflation when new, cheaper substitute goods enter the market?

Answer: CPI

The CPI's fixed basket doesn't let consumers substitute toward cheaper new goods, so it can overstate inflation compared to the GDP deflator.