Consumer Price Index (CPI) vs Gross Domestic Product (GDP) Deflator

What is the difference between Consumer Price Index (CPI) and Gross Domestic Product (GDP) Deflator?

The amount of inflation in the economy of a country can be determined by using two different calculations – consumer price index (CPI) and gross domestic product (GDP) deflator. Although some people may get confused between then, they each have a different purpose.

Brief overview of CPI deflator

The CPI (consumer price index) is a very important indicator of inflation and therefore it is watched very closely. The statistics related to this facet of the economy reflect the changes in real market values. It is the measure of the change that occurs over time in the prices of consumer goods that every household buys. There is a list of fixed items that are tracked and in this way the rate of inflation is also tracked. Governments use the CPI to regulate prices because they also take such things as salaries and pensions into account. When the monetary values are deflated, it is possible to see the changes that occur in the real value of goods by using the consumer price index.

Brief overview of GDP deflator

The GDP (gross domestic product) measures the total value of all the products produced in a country over a specific period of time. Although it does look at the prices of all products, it focuses more on new products that are produced from start to finish in the economy. It is much broader in scope than CPI because in addition to looking at how consumers have changed their buying habits and the changes in prices, it looks at all the goods produced in a time period and the market value of these goods. In this way, the GDP is a more up to date determinant of inflation.

The difference between CPI and GDP

Even though there are a lot of similarities between CPI and GDP deflators, there is still a small difference between them. The main difference is that the GDP is a reflection of the prices of all the services and goods that an economy produces and the CPI reflects the changes that occur in prices over time in a specific list of goods and services that consumers buy.  Thus there is a list of products and services that are studied in the CPI, but everything is studies in the GDP.

There are some countries of the world where the CPI and the GDP deflators are calculated on a regular basis. This sometimes results in very significant changes in revenues and expenditures – often in the billions of dollars. The value of both of these economic indicators cannot be underestimated.

Summary

  1. CPI and GDP are two ways that countries measure the rate of inflation in the economy.
  2. GDP focuses more on the price level of new products and services produced in a country over a specific period of time.
  3. CPI measures the changes that occur in the price of a specific list of goods and services that consumers buy on a regular basis.
  4. GDP uses the current prices of goods and services and compares them to that of the previous year.