What is a GDP deflator? Why do some economists consider the GDP deflator to be a better measure of overall inflation than the Consumer Price Index?
The price index used to deflate nominal GDP is called the GDP deflator. It is a broad measure of economywide inflation; it includes the prices of all goods and services in the economy. Some economists consider the GDP deflator to be a better measure of overall inflation than the Consumer Price Index. The main reason is that the GDP deflator is based on a broader market basket. The CPI is based on the budget of a typical urban family. By contrast, the GDP deflator is constructed from a market basket that includes every item in the GDP?that is, every final good and service produced by the economy.
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A worker in Vietnam can earn $6 per day making cotton cloth on a hand loom. A worker in the United States can earn $85 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?
a. U.S. textile workers belong to a union, whereas Vietnamese textile workers do not belong to a union. b. There is little demand for cotton cloth in Vietnam and great demand in the U.S. c. Labor is more productive making cotton cloth with a mechanical loom than with a hand loom. d. Vietnam has a low-wage policy to make its textile industry more competitive in world markets.