Q. Consider the following statements regarding GDP deflator?
1.It is the ratio between GDP at Current Prices and GDP at Constant Prices.
2.It is acclaimed as a better measure of price behavior because it covers all goods and services produced in the country.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: C
Notes:

Explanation: GDP deflator is the ratio between GDP at Current Prices and GDP at Constant Prices.

  • If GDP at Current Prices is equal to the GDP at Constant Prices, GDP deflator will be 1, implying no change in price level.
  • If GDP deflator is found to be 2, it implies rise in price level by a factor of 2, and if GDP deflator is found to be 4, it implies a rise in price level by a factor of 4.
  • GDP deflator is acclaimed as a better measure of price behavior because it covers all goods and services produced in the country (because the weight of services has not been equitably accounted in the Indian ‘headline inflation’, i.e., inflation at WPI).

Source: Ramesh Singh