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Chapter 22: Q 24. (page 553)

Why is the GDP deflator not an accurate measure of inflation as it impacts a household?

Short Answer

Expert verified

Because of the various reasons GDP deflator is not an accurate measure of inflation.

Step by step solution

01

Step 1. Definition

The GDP deflator is mainly used in calculating inflation. It is the ratio between the value of goods and services produced by an economy to the price in a given period of time.

02

Step 2. Explanation

GDP deflator includes only the goods which are produced in an economy and does not include the ones which are purchased by the consumers. So, this is the main reason why it is not considered the accurate measure of inflation. It will also not calculate the accurate measure of the cost of ling of people. To get an accurate measure of inflation GDP deflator must include the goods and services which are consumed in the economy.

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Most popular questions from this chapter

The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer.

Why does “substitution bias” arise if we calculate the inflation rate based on a fixed basket of goods?

Edna is living in a retirement home where most of her needs are taken care of, but she has some discretionary spending. Based on the basket of goods in Table 9.5, by what percentage does Edna’s cost of living increase between time 1and time 2?

Over the last century, during what periods was the U.S. inflation rate highest and lowest?

Why do you think the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries?
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