Download presentation
Presentation is loading. Please wait.
Published byFranklin Shields Modified over 9 years ago
1
GDP Deflator vs. CPI Index Two price indices to measure Inflation
2
GDP Deflator Purpose: Converts Nominal GDP into Real GDP –Nominal-absolute dollars from that year –Real-inflation adjusted dollars from base year Real dollars also called “Constant Dollars “ Only real GDP reflects true quantity of goods/services produced If Real GDP => you are making more goods/services
3
GDP Deflator vs. CPI Index Both measure inflation but two important differences often cause them to diverge GDP deflator reflects prices of all goods/services produced domestically –broader index than CPI but excludes imports CPI index reflects prices only a market basket of some goods/services bought by consumers –Narrow, consumer index, but includes imports
4
Two Measures of Inflation Diverge 1965 Percent per Year 15 CPI GDP deflator 10 5 0 1970197519801985199020001995 2005 Oil Spikes raises CPI more than GDP Deflator Conclusion: Oil is a bigger % of the CPI Index than GDP Deflator
5
Nominal GDP Real GDP X 100 GDP Deflator Index = Base Year will always be 100 GDP Deflator math is similar to CPI Index Real GDP = Nominal GDP X 100 Price Index
6
Why Inflation is Bad? Difficult for Business to plan for future –price goods/services unclear –Investment becomes difficult Lowers value of U.S. currency Lowers purchasing power (real value of money) Raises long term interest rates –Bond buyers need more nominal interest!
7
Formula Sheet
Similar presentations
© 2025 SlidePlayer.com Inc.
All rights reserved.