CPI vs GDP Deflator

Similarity between CPI and GDP Deflator
- Both are used to determine price inflation.
- Both reflect the current economic state of a nation.
GDP Deflator
- Considers only goods and services produced domestically.
- Excludes imports.
- Reflects the prices of all commodities and services.
- Calculated quarterly.
- Weights change with each calculation depending on current production and spending.
- Formula:
  - GDP Deflator = (Nominal GDP ÷ Real GDP) × 100.
- Compares price level in the current year vs base year.
- Basket of goods is not fixed – it changes with investment and consumption patterns.
GDP (Gross Domestic Product)
- Total value of all final goods and services produced within a country’s borders in a given time period.
- Two types:
  - Nominal GDP – measured at current prices.
  - Real GDP – adjusted for inflation.
CPI (Consumer Price Index)
- Measures the prices of a fixed basket of goods and services purchased by consumers.
- Widely used to measure the cost of living.
- Compares current prices to a base period.
- Fixed basket may include outdated or insignificant goods still counted in pricing.
- Focuses only on consumption goods.
- Excludes:
  - Prices of production inputs.
  - Prices of investment goods.
  - Machinery and industrial equipment.
Key Differences: CPI vs GDP Deflator
- Basket: CPI uses a fixed basket; GDP deflator uses a changing basket that reflects actual production and expenditure.
- Coverage: CPI covers consumer goods (including imports); GDP deflator covers all domestically produced goods and services but excludes imports.
- Flexibility: CPI is less flexible due to fixed items; GDP deflator adjusts with changing patterns of consumption and investment.
- Use: CPI measures cost of living; GDP deflator measures inflation across the economy as a whole.
Conclusion
- Both measure inflation, but they are not identical.
- Over long periods, CPI and GDP deflator provide similar numbers.
- Over short periods, results may diverge.