Question

If nominal GDP growth between period t−1 and t was 3.3%, while real GDP growth during the same time was 2.7%, then the GDP deflator in between t−1 and t. a)must have increased due to inflation. b)possibly increased due to deflation. c)must have decreased due deflation. d)stayed the same due to inflation. e)possibly decreased due to deflation.

Answer 1

GDP deflator is defined as:

$\text {GDP deflator } = \frac{\text{Nominal GDP}}{\text{Real GDP}}$

Taking logs on both sides and differentiating with respect to time, we get:

(To get growth rate form equation)

$\Delta_{\text{GDP Deflator }} = \Delta_{\text{Nominal GDP}} -\Delta_{\text{Real GDP }}\\\\ \Rightarrow \text {Growth of GDP deflator } = \text{Growth of Nominal GDP} -{\text{Growth of Real GDP}}$

Given nominal GDP growth rate between period t−1 and t is 3.3%, while real GDP growth during the same time is 2.7%

$\Rightarrow \text {Growth of GDP deflator } =3.3 - 2.7 = 0.6 \%$

which is positive.

Growth of GDP deflator is a measure of inflation rate.

Hence GDP deflator in between t−1 and t must have increased due to inflation.

Correct Ans - a