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RISK LOVING: A person who values a certain income less than an equal amount of income that involves risk or uncertainty. Suppose that you have two options--(A) a guaranteed $1,000 or (b) a 50-50 chance of getting either $500 or $1,500. If you chose option B, then you're risk loving. While both options give you the same "expected" values, you get more satisfaction from the risky option than the guaranteed one. In fact, risk loving people are willing to pay for the opportunity to experience a risky situation.
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                           CPI AND GDP PRICE DEFLATOR: The Consumer Price Index (CPI) and the GDP price deflator represent two alternative measures of the economy's price level and the inflation rate. The CPI is reported more often (monthly versus quarterly), but the GDP price deflator is a broader measure of the price level (all final production versus urban consumption). While the CPI is better known, economists tend to prefer the accuracy of the GDP price deflator. So which is a better measure, the CPI or the GDP price deflator? Which should be used to gain insight into the economy and for economic analysis? The CPI is generated by the good folks at the Bureau of Labor Statistics (BLS) and the GDP price deflator comes from the fine folks at the Bureau of Economic Analysis (BEA). Both groups are comprised of dedicated economists and statisticians who are interested in reporting accurate measures.Two criteria are most important when it comes to evaluating price indexes: coverage and timeliness. CoverageThe first criterion is the prices included in the index, that is, what goods, services, and production is covered by each index? The GDP price deflator comes out ahead in this regard. The CPI measures ONLY the prices of goods and services typically purchased by urban consumers. These goods and services constitute only about 60 percent of the economy's total production. The GDP price deflator, in contrast, measures the prices of TOTAL production in the economy. It includes prices not just for goods purchased by urban consumers, but also by rural consumers, government agencies, business for investment, and the foreign sector.Moreover, the CPI measures the prices of a market basket of goods and services associated with a base period, which could be 5 to 10 years or more out of date. While the BLS does make periodic adjustments to the composition of the market basket caused by changing tastes, technology, and relative prices, the CPI never measures the prices of goods actually bought during a given month. Alternatively, the GDP price deflator measures the prices of CURRENT production. The prices included in the GDP price deflator are for the goods and services actually produced during the current period. TimelinessThe second criterion is the timeliness of the index availability, that is, when is each index reported? The CPI comes out ahead in this regard. The GDP price deflator is reported quarterly (every three months) and is the average for the preceding three-month period. Not only is information on the January price level unavailable until April, there is no specific price level information just for January. The CPI, in contrast, is reported monthly, usually two weeks into the following month. As such, the CPI indicates the January price level by mid-February.Taking a StandThe CPI is definitely limited in what it measures. But while it only accounts for about 60 percent of the economy's production that is purchased by urban consumers, this is a relatively important 60 percent for most people. The vast majority of the nation's population can get a good idea of how inflation affects them by looking at the CPI because it measures the types of goods they buy. And best of all, the CPI comes out monthly. It is available when needed.And although the CPI is incomplete as an aggregate measure, historical comparisons of the CPI and GDP price deflator reveal that much of the time they generate the same inflation rate, and when they differ, they do not differ by much. The CPI might indicate a 2.6 percent inflation rate while the more accurate GDP price deflator comes in at 2.5 percent. Different, certainly, but not too far off. While the CPI is a great "first approximation" of the price level and inflation rate, the GDP price deflator is the one best suited for heavy duty economic analysis and policy making. While the CPI might differ from the GDP price deflator by only a fraction of a percentage point, this could be important for some economic policy decisions.
Recommended Citation:CPI AND GDP PRICE DEFLATOR, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2025. [Accessed: July 13, 2025].
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Today, you are likely to spend a great deal of time searching for a specialty store hoping to buy either an AC adapter for your CD player or storage boxes for your family photos. Be on the lookout for letters from the Internal Revenue Service.
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General Electric is the only stock from the original 1896 Dow Jones Industrial Average remaining in the current index.
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"To sit back and let fate play its hand out, and never influence it, is not the way man was meant to operate." -- John Glenn, astronaut, U.S. senator
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EFTS
Electronic Fund Transfer Systems
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