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With reference to GDP Deflator, consider the following statements:
It can be used to track the monthly change in inflation.
It includes the prices of investment goods and the price of imports.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
With reference to GDP Deflator, consider the following statements: ...
The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100.
Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices). Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices). However, WPI and CPI are available monthly whereas deflator comes with a lag (yearly or quarterly, after quarterly GDP data is released).
Hence, the monthly change in inflation cannot be tracked using the GDP deflator, limiting its usefulness. So, statement 1 is not correct. The GDP deflator includes the prices of investment goods, government services and exports, and excludes the price of imports.
Changes in consumption patterns or the introduction of new goods and services or structural transformation are automatically reflected in the deflator which is not the case with other inflation measures. So, statement 2 is not correct. Therefore, the correct answer is d.
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Community Answer
With reference to GDP Deflator, consider the following statements: ...
The correct answer is option 'D' - Neither 1 nor 2.
Explanation:
1. It can be used to track the monthly change in inflation: Incorrect
The GDP deflator is a measure of the average price level of all final goods and services produced within an economy. It is a broad measure that includes the prices of goods and services consumed by households, businesses, and the government. However, it is not specifically designed to track the monthly change in inflation. For that purpose, other indicators like the Consumer Price Index (CPI) or the Producer Price Index (PPI) are more appropriate.
2. It includes the prices of investment goods and the price of imports: Incorrect
The GDP deflator measures the overall price level of an economy by comparing the nominal GDP (the value of all goods and services produced at current prices) with the real GDP (the value of all goods and services produced at constant prices). It reflects the average price change of all goods and services produced domestically, regardless of whether they are investment goods or imports. However, it does not specifically include only the prices of investment goods or imports.
In conclusion, neither statement 1 nor statement 2 is correct. The GDP deflator is a measure of the overall price level in an economy and is not specifically designed to track monthly changes in inflation. Additionally, it includes the prices of all goods and services produced domestically, not just investment goods or imports.
Explanation:
1. It can be used to track the monthly change in inflation: Incorrect
The GDP deflator is a measure of the average price level of all final goods and services produced within an economy. It is a broad measure that includes the prices of goods and services consumed by households, businesses, and the government. However, it is not specifically designed to track the monthly change in inflation. For that purpose, other indicators like the Consumer Price Index (CPI) or the Producer Price Index (PPI) are more appropriate.
2. It includes the prices of investment goods and the price of imports: Incorrect
The GDP deflator measures the overall price level of an economy by comparing the nominal GDP (the value of all goods and services produced at current prices) with the real GDP (the value of all goods and services produced at constant prices). It reflects the average price change of all goods and services produced domestically, regardless of whether they are investment goods or imports. However, it does not specifically include only the prices of investment goods or imports.
In conclusion, neither statement 1 nor statement 2 is correct. The GDP deflator is a measure of the overall price level in an economy and is not specifically designed to track monthly changes in inflation. Additionally, it includes the prices of all goods and services produced domestically, not just investment goods or imports.
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With reference to GDP Deflator, consider the following statements: It can be used to track the monthly change in inflation. It includes the prices of investment goods and the price of imports. Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'D'. Can you explain this answer?
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