A country produces only bread. In the base year it produces 100 units at Rs 10 each. In the current year it produces 110 units at Rs 12 each. A representative consumer buys 50 units of bread and 1 imported mobile phone every year; the phone cost Rs 500 in the base year and Rs 400 in the current year. What are the GDP deflator and the CPI of the current year (both in percentage terms)?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → GDP deflator 120, CPI 100
Given:
Bread, base year: 100 units at Rs 10
Bread, current year: 110 units at Rs 12
Consumer basket: 50 units of bread and 1 imported phone
Phone: Rs 500 in the base year, Rs 400 in the current year
The GDP deflator covers only goods produced in the country (bread). The CPI covers the consumer’s basket, imported phone included.
Nominal GDP = 110 × 12 = 1,320
Real GDP = 110 × 10 = 1,100
GDP deflator = (1,320 ÷ 1,100) × 100 = 120
Basket cost, base year = 50 × 10 + 500 = 1,000
Basket cost, current year = 50 × 12 + 400 = 1,000
CPI = (1,000 ÷ 1,000) × 100 = 100
The phone’s price fall cancels the rise in bread prices in the CPI, but the phone is not in the GDP deflator.
NCERT (2026-27): “2.4 Nominal and Real GDP … Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. In the calculation of real and nominal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. Thus if GDP stands for nominal GDP and gdp stands for real GDP then, GDP deflator = GDP gdp . Sometimes the deflator is also denoted in percentage terms. In such a case deflator = GDP gdp × 100 per cent. In the previous example, the GDP deflator is 1,650 1,100 = 1.50 (in percentage terms this is 150 per cent). This implies that the price of bread produced in 2001 was 1.5 times the price in 2000. Which is true because price of bread has indeed gone up from Rs 10 to Rs 15. …” “2.4 Nominal and Real GDP … We calculate the cost of purchase of a given basket of commodities in the base year. We also calculate the cost of purchase of the same basket in the current year. Then we express the latter as a percentage of the former. …” “2.4 Nominal and Real GDP … Like CPI, the index for wholesale prices is called Wholesale Price Index (WPI). In countries like USA it is referred to as Producer Price Index (PPI). Notice CPI (and analogously WPI) may differ from GDP deflator because |