As the world is getting in-depth knowledge of economics, some economic concepts are becoming more acceptable day by day. The concept of inflation is one of such concept which became popular during the last century. Two mostly used inflation measurement methods around the world are CPI (Consumer Price Index) and GDP (Gross Domestic Product) deflator. Now, one method is getting popularity in the world with the passage of time over the other method of measuring inflation.

You are required to comment on the major distinction between CPI index and GDP deflator and which method of inflation measurement has advantage over others and on what specific grounds?"

Instructions:



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solution:
In economics the GDP deflator (Implicit price deflator of GDB) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy, GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period.

Inflation has been defined as a process of continuously rising prices or equivalently of a continuously falling value of money, Various indexes have been devised to measure different aspects of inflation. The CPI measures inflation as experienced by consumers in their day-to-day living expenses, the producer price index (PPI) measures inflation at earlier stages of the production process: the Employment Cost index (PPI) measures inflation at earlier stages of the production process: the Employment cost index (ECI) measures it in the labor market: the BLS International Price Program measures it for imports and exports: and the Gross Domestic Product Deflator (GDP Deflator) measures inflation experienced by both consumers themselves as well as governments and other institutions providing goods and services to consumers. Finally, there are specialized measures, such as measures of interest rates.

The “best” measure of inflation for a given application depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase at today’s prices, a market basket of goods and services equivalents to one that they could purchase in an earlier period.