Real GDP offers a better perspective than nominal GDP when tracking economic output over a period of time. When people use GDP numbers, they are often talking about nominal GDP, which can be defined as the total economic output of a country. This output is measured at current price levels and currency values, without factoring in inflation. And nominal GPD also includes increase in output do to price changes and therefore is not comparable year to year. By removing inflation or computing real GDP economists can see how much the economy has actually grown vs. last year.
The GDP deflator is an economic measure that tracks the cost of goods produced in an economy relative to the purchasing power of the dollar. This means nominal GDP in a given year divided by real year then multiplied by 100.
A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. A 10% increase in the price of chicken will have a greater impact than a 10% increase in the price of caviar. This is based on customers will spend a much larger share of their total expenditures on chicken than on caviar.
The three factors that make the consumer price index imperfect measure of the cost of living will be:
1. Does not capture how people change their consumption habits when the relative prices of goods change.
2. Does not account for the introduction of new goods.
3. Does not measure quality change.
The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy where as the CPI is a measure of the prices of goods in a consumer's basket. The consumer's basket includes goods which are consumed by most people. Maybe economists believe that CPI overstates the rate of...