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CPI vs. GDP deflator

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How do the CPI and the GDP deflator differ? Why do economists believe that the CPI overstates the rate of inflation? Is this an important problem?

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Solution Summary

Differences between the CPI and GDP deflator are provided.

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The GDP deflator includes only those good produced domestically, since it is tied to gross domestic product. CPI, on the other hand, includes the price of all products typically purchased by a consumer, whether imported or not. Therefore, there could be a slight difference between the two although it is generally quite small. Theoretically, because the deflator it isn't based on a fixed basket of goods and services, it has an advantage. Changes in spending ...

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