GDP Deflator and Inflation 2 — Questions and Answers
Question 1: If nominal GDP rises 8% and the GDP deflator rises 5%, what is the approximate real GDP growth rate?
- 13%
- 3% (Correct answer)
- 8%
- 5%
Correct answer: 3%
Real GDP growth ≈ nominal GDP growth minus the GDP deflator growth rate, so 8% − 5% = 3%.
Question 2: 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?
- 125%
- 25% (Correct answer)
- 12.5%
- 1.25%
Correct answer: 25%
A deflator of 125 relative to a base of 100 means prices have risen 25% since the base year.
Question 3: Which of the following is NOT included in the GDP deflator's price index?
- Consumer goods produced domestically
- Government services
- Capital investment goods
- Imported consumer goods (Correct answer)
Correct answer: Imported consumer goods
The GDP deflator covers only domestically produced goods and services; imports are excluded because they are not part of GDP.
Question 4: A country's nominal GDP is $2 trillion and the GDP deflator is 80. What is real GDP?
- $1.6 trillion
- $2.5 trillion (Correct answer)
- $1.6 billion
- $2 trillion
Correct answer: $2.5 trillion
Real GDP = (Nominal GDP / GDP Deflator) × 100 = ($2T / 80) × 100 = $2.5 trillion.
Question 5: If the GDP deflator falls from one year to the next, this indicates:
- Positive inflation
- Deflation in the overall economy (Correct answer)
- Rising nominal GDP
- An increase in imports
Correct 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.
Question 6: How does the GDP deflator differ from the CPI in terms of the basket of goods used?
- The GDP deflator uses a fixed basket; the CPI uses a changing basket
- The CPI uses a fixed basket; the GDP deflator uses a changing basket reflecting current output (Correct answer)
- Both use identical fixed baskets
- Neither uses a basket — both rely on price surveys
Correct 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.
Question 7: Which price index tends to show higher measured inflation when new, cheaper substitute goods enter the market?
- GDP deflator
- CPI (Correct answer)
- PPI
- PCE deflator
Correct 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.
GDP Deflator and Inflation 2
If nominal GDP rises 8% and the GDP deflator rises 5%, what is the approximate real GDP growth rate?