Final answer:
The CPI and the GDP deflator are measures of inflation, but they differ in what they measure and how they are calculated. The CPI measures changes in prices faced by consumers, while the GDP deflator measures changes in prices faced by both consumers and producers. Additionally, the CPI uses a fixed basket of goods and services, while the GDP deflator accounts for changes in the composition of output and consumption.
Step-by-step explanation:
The CPI (Consumer Price Index) and the GDP deflator are both measures of inflation, but they differ in terms of what they measure and how they are calculated.
The CPI measures the average change in prices of goods and services purchased by urban consumers over time. It reflects changes in the cost of living and is used to adjust wages, benefits, and government programs. On the other hand, the GDP deflator measures the average change in prices of all goods and services produced in an economy. It captures inflationary pressures in the overall economy and is used to measure the change in the value of the country's nominal GDP.
One key difference between the two is that the CPI only measures prices faced by consumers, while the GDP deflator measures prices faced by both consumers and producers. Another difference is that the CPI uses a fixed basket of goods and services, while the GDP deflator accounts for changes in the composition of output and consumption.