UPPCS Mains- 2018 Answer writing practice #49

UPPCS Mains- 2018 answer writing practice

What is GDP inflator? Is it a better indicator of inflation than CPI/WPI? (200 words)

जीडीपी इनफ्लोटर क्या है? क्या यह सीपीआई / डब्ल्यूपीआई की तुलना में मुद्रास्फीति का बेहतर संकेतक है? (200 शब्द)

The GDP deflator is the ratio of the value of goods and services an economy produces in a particular year at current prices to that at prices prevailing during any other reference (base) year.
GDP deflator = (Nominal GDP/Real GDP)*100
This ratio basically shows to what extent an increase in GDP in an economy has happened on account of higher prices, rather than increased output. Hence, it is a good measure of inflation.

Comparison with GDP deflator
>Hence, the GDP deflator is the most accurate indicator of the underlying inflationary tendency, as it covers all goods and services produced in the economy and better gauge of inflation in the economy. The WPI does not represent service sector, whereas CPI represents the change in the price only at the retail level. GDP deflator thus provides a better coverage of the trends of inflation in entire economy.
>Despite the comprehensiveness it is not used for monetary policy measures by RBI as it is available only on a quarterly basis along with GDP estimates, whereas CPI and WPI data are released every month.
>Also, RBI uses CPI to measure inflation as consumers experience or expect in future is what gets factored in wage bargains and also determines the allocation of household savings across different assets. Interest rates will also have to be sufficiently above CPI inflation, so that households continue to park their savings in bank deposits as opposed to gold or real estate.

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