Correct Option
The correct option is 1 and 3 only.
Explanation
The GDP Deflator, also known as the implicit price deflator, is a comprehensive measure of inflation that reflects the price levels of all goods and services produced domestically within an economy. It is derived from the relationship between Nominal GDP and Real GDP.
Statement-wise Analysis
- Statement 1 is Correct: The GDP Deflator is calculated as the ratio of Nominal GDP to Real GDP, typically expressed as a percentage. The formula is:
GDP Deflator = (Nominal GDP / Real GDP) × 100.
Nominal GDP is the value of output at current prices, while Real GDP is the value of output at constant (base year) prices. - Statement 2 is Incorrect: The GDP Deflator measures the change in prices of goods and services, not the quantity. Changes in the quantity of goods produced are measured by Real GDP. The Deflator isolates the price component from the Nominal GDP to determine the extent of inflation or deflation.
- Statement 3 is Correct: The GDP Deflator covers only those goods and services that are produced domestically. Consequently, it does not include the prices of imported goods. In contrast, the Consumer Price Index (CPI) measures the cost of a fixed basket of goods and services consumed by households, which includes imported items (such as imported oil or electronics).
Key Takeaway
Key Takeaway: The GDP Deflator is a broader measure of inflation than the CPI because it includes all domestically produced goods and services, but it excludes imported goods, which are included in the CPI basket.