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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

What has been a typical range of inflation in the U.S. economy in the last decade or so?

The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=£940, year 2=£970, year 3=£1000, and year 4=£1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out.

Why does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of

goods?

Identify several parties likely to be helped and hurt by inflation.

Name several forms of indexing in the private and

public sector.
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