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BEA constructs a price index for each of these categories, and the various price indexes are aggregated into the overall GDP price index for the United States. The GDP price index, like the CPI, measures price change for consumer goods and services, but also measures price change for goods and services purchased by businesses, governments, and foreigners. For example, the CPI for financial services includes only checking accounts and other bank services, as well as tax return preparation and other accounting fees, and has less than a 0.
The GDP price index is calculated with a Fisher ideal index formula, which is able to pick up changes in the allocation of expenditures by consumers across the broad categories of consumer goods and services covered by GDP.
As shown in figure 1, the GDP implicit price deflator has risen at a systematically lower rate than the CPI-U over time 2 percent annually for the GDP price index and implicit price deflator, versus 2. The choice of which one to use in a given scenario likely depends on the set of goods and services in which one is interested as a measure of price change.
The CPI measures price change from the perspective of an urban consumer and thus pertains to goods and services purchased out of pocket by urban consumers. The GDP price index and implicit price deflator measure price change from the perspective of domestic production of good and services and thus pertain to goods and services purchased by consumers, businesses, government, and foreigners, but not importers.
In addition, the formulas used to calculate these two measures differ. Jonathan D. Church, "Comparing the Consumer Price Index with the gross domestic product price index and gross domestic product implicit price deflator," Monthly Labor Review, U. Dalton, John S. Greenlees, and Kenneth J. National Income and Product Accounts U. Bureau of Economic Analysis, December , chapters 1—4, p. National Income and Product Accounts , chapters 1—4, p. Bureau of Economic Analysis, December , pp. See also Concepts and methods of the U.
National Income and Product Accounts , chapters 1—4, pp. In the Laspeyres index calculation, price relatives are weighted by quantity in a base period i. In the Paasche index calculation, price relatives are weighted by quantity in the current period.
In the case of price indexes, the Fisher ideal index allows for the measurement of real-time changes in quantity. McCully, Brian C. Moyer, and Kenneth J. Bureau of Economic Analysis and U. For instance, let's say the U. The GDP price deflator helps to measure the changes in prices when comparing nominal to real GDP over several periods.
We use the following formula to calculate the GDP price deflator:. The result means that the aggregate level of prices increased by 25 percent from the base year to the current year. This is because an economy's real GDP is calculated by multiplying its current output by its prices from a base year.
The GDP price deflator helps identify how much prices have inflated over a specific time period. This is important because, as we saw in our previous example, comparing GDP from two different years can give a deceptive result if there's a change in the price level between the two years.
Without some way to account for the change in prices, an economy that's experiencing price inflation would appear to be growing in dollar terms. However, that same economy might be exhibiting little-to-no growth, but with prices rising, the total output figures would appear higher than what was really being produced.
There are other indexes out there that also measure inflation. Many of these alternatives, such as the popular consumer price index CPI , are based on a fixed basket of goods. The CPI, which measures the level of retail prices of goods and services at a specific point in time, is one of the most commonly used inflation measures because it reflects changes to a consumer's cost of living.
However, all calculations based on the CPI are direct, meaning the index is computed using prices of goods and services already included in the index.
The fixed basket used in CPI calculations is static and sometimes misses changes in prices of goods outside of the basket of goods.
For instance, changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator but not in the CPI. What this means is that the GDP price deflator captures any changes in an economy's consumption or investment patterns. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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