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Question

17. Which of the following statement(s) is/are correct about GDP Deflator?
1. The GDP Deflator measures the ratio of nominal to real GDP.
2. GDP Deflator measures the change in the price level between the base year and the current year.
3. GDP deflator does not include prices of imported goods.
Correct answer code is:

A
Only 1 and 2
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B
Only 2 and 3
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C
Only 1 and 3
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D
All of the above
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Solution

The correct option is D All of the above

The Gross Domestic Product (GDP) deflator is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100.
1.
Nominal GDP is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices).
2. Real GDP is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices).
There are other measures of inflation too like Consumer Price Index (CPI) and Wholesale Price Index (or WPI); however GDP deflator is a much broader and comprehensive measure.
3.
Since Gross Domestic Product is an aggregate measure of production, being the sum of all final uses of goods and services, GDP deflator reflects the prices of all domestically produced goods and services in the economy whereas, other measures like CPI and WPI are based on a limited basket of goods and services, thereby not representing the entire economy.
4. Another important distinction is that the basket of WPI (at present) has no representation of services sector.
5. The GDP deflator also includes the prices of investment goods, government services and exports, and excludes the price of imports.
6. Changes in consumption patterns or the introduction of new goods and services or structural transformation are automatically reflected in the deflator which is not the case with other inflation measures.
7. GDP Deflator is calculated by the Ministry of Statistics and Programme Implementation


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