With an Indian Perspective

Prepared By :Abhishek

MBA 1st YearDoMS ,IITR

GDP: Market Value of all finished goods and services

produced in an economy in a given period of time.

GDP = Consumption+ Investment+ Government Purchases+

Net Exports.

Nominal GDP: Value of goods and services measured at

current prices.

Real GDP: Value of Goods and services at base year prices.

GDP Deflator: (Nominal GDP/Real GDP) x100

A Rupee doesn’t buy as much as it did twenty years ago!

Inflation: Increase in the overall level of prices.

CPI: a measure estimating the average price of consumer

goods and services purchased by households.

CPI = (Product x Pricescurrent year)/ (Product x Pricesbase

year)

Reliably aggregates the prices of different goods and

services in a single index. Most watched index.

GDP Deflator CPI

Measures the prices of all goods and services

Includes only domestically produced goods and services

Assigns Changing weights to the prices of different goods

Paasche Index

Understates Inflation

Measures thee prices of goods and services bought by the consumers

Includes all goods and services bought here

Assigns fixed weights to the prices of different goods

Laspeyres Index

Overstates inflation

Suppose a country’s entire crop of orange is destroyed. The prices of those remaining in stock skyrocket.

Increase in orange prices does not show up in GDP deflator as it no longer a part of GDP.

The same event causes a substantial rise in CPI as it considers a fixed basket of goods.

Source: rbidocs.rbi.org.in/rdocs/Speeches/PDFs/IAEDF140110.pdf

Although the two diverge at times, they usually agree.

Generally tell the same story about how quickly the prices are rising in an economy.