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Difficulty: EasyEconomic Growth, National Income Accounting, and Development Indicators

Consider the following statements regarding the GDP Deflator:

1. It is calculated as the ratio of Nominal GDP to Real GDP expressed as a percentage.
2. It includes the prices of imported consumer goods to measure domestic price level changes.

Which of the statements given above is/are correct?

  1. 1 onlyAnswer
  2. B
    2 only
  3. C
    Both 1 and 2
  4. D
    Neither 1 nor 2

Answer

The statement declaring that the GDP Deflator is the ratio of Nominal GDP to Real GDP is correct, whereas the statement claiming it includes imported consumer goods is incorrect.
The GDP Deflator measures the average price level of all final goods and services produced domestically within an economy. Its formula is GDP Deflator=Nominal GDPReal GDP×100\text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100, making Statement 1 true. Because GDP by definition includes only output produced within the national border, imported items are completely excluded from the GDP Deflator calculation, making Statement 2 false.

Step-by-Step Solution

1
Evaluate Statement 1 regarding the formula of the GDP Deflator.
The GDP Deflator is an index measuring comprehensive price level changes in an economy, calculated as GDP Deflator=(Nominal GDPReal GDP)×100\text{GDP Deflator} = \left( \frac{\text{Nominal GDP}}{\text{Real GDP}} \right) \times 100. Statement 1 is true.
Nominal GDP measures output at current prices, while Real GDP measures output at constant base-year prices.
2
Evaluate Statement 2 regarding the boundary coverage of the GDP Deflator.
Gross Domestic Product (GDP) strictly measures output produced within the economic boundary of a country. Consequently, the GDP Deflator covers only domestically produced goods and services, excluding imported goods entirely. Statement 2 is false.
Imported consumer goods are reflected in price indices like the Consumer Price Index (CPI), not the GDP Deflator.

Key Concept

GDP Deflator vs. CPI Coverage Boundaries
Estimated Time:45s
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Topics

Economic Growth, National Income Accounting, and Development Indicators