When we talk about the field of economics, it is essential to know what are the similarities and differences between the ‘GDP deflator’ and the ‘CPI’? since these elements allow to know the level of growth of a country to analyze the quality of life of its inhabitants.
What are the Similarities and Differences Between the ‘GDP Deflator’ and the ‘CPI’?
- What is the GDP deflator?
- What is the CPI?
- What are the similarities and differences between the ‘GDP deflator’ and the ‘CPI’?
What is the GDP deflator?
GDP (Gross Domestic Product) refers to the monetary value of all the goods and services that are generated by each country in the span of one year. Therefore, GDP makes it possible to measure the annual economic production of a country.
This element, like other financial indicators, facilitates the understanding of the importance of money not only in the life of the human being but also in the business and social area.
What is the CPI?
CPI stands for “Consumer Price Index” and refers to an indicator used to know how prices evolve and determine whether or not there is inflation in the economy; It is even possible to establish a relationship between interest rates and inflation on an annual basis.
What are the similarities and differences between the ‘GDP deflator’ and the ‘CPI’?
To know the similarities and differences between the ‘GDP deflator’ and the ‘CPI’ it is convenient that you know the usefulness of each of these indicators and the points of relationship and divergence of the same as we expose below.
Utility of the GDP deflator
The main utility of the GDP deflator is that it allows knowing all the changes in purchasing habits on an annual basis. In this way, the purchasing power of a country is determined.
Utility of the CPI
The CPI is used to collect information about the cost of living and the increase in prices . However, we cannot confuse the CPI with the term inflation, which refers to an imbalance between supply and demand in a country’s economy.
Similarities between the GDP deflator and the CPI
Both the GDP deflator and the CPI are measurable indicators in a specific period of time . In addition, both are part of the elements that allow you to study the economy in general in order to determine and analyze why some countries are more prosperous than others.
They allow to measure the state of ‘health’ of a country
The GDP deflator and the CPI work as thermometers to measure the state of health of a country based on its economy. Therefore, the final goods and services that a country develops can be directly related to a higher level of production , a better quality of life and a good development of human resources in any company.
They are part of the objectives of every government
Both the GDP deflator and the CPI are part of the objectives that every government sets itself when seeking to increase the growth rates of the gross domestic product while containing the consumer price index. If not, it is convenient for entrepreneurs to learn how to advertise a price increase to preserve customers.
Differences between the GDP deflator and the CPI
One of the factors that create divergence between the GDP deflator and the CPI is the type of consumer, since the GDP serves as an indicator for urban consumers , while the CPI includes all consumers, that is, both rural and urban.
The quantity of products
It is important to note that a clear difference between the GDP deflator and the CPI is stipulated by the quantity of products that each indicator takes into account in order to measure the increase in prices.
In this sense, the CPI includes a weighted and highly representative sample of people’s consumer products. While the GDP deflator allows the calculation with all the elements in a more general and comprehensive way.
Intermediate consumption and exported products
Intermediate consumption at the business level and the products that a country exports are two elements that the CPI does not include, since these are part of the study of the macroeconomy using the GDP deflator.