Principles of Macroeconomics

\(\text{GDP Deflator}=\frac{\text{Nominal GDP}}{\text{Real GDP}}\cdot \text{100%}\)

\(CPI_t=\frac {\text{Price of basket in year t}}{\text{Price of basket in base year}}\cdot \text{100%}\)

\(\text{Inflation rate in year 2}=\frac {CPI_{t2}-CPI_{t1}}{CPI_{t1}}\cdot \text{100%}\)

• Substitution bias
• Introduction of new goods
• Unmeasured quality changes

1. The GDP deflator reflects the prices of all goods and services produced domestically, whereas the consumer price index reflects the prices of all goods and services bought by consumers.

2. The consumer price index compares the price of a fixed basket of goods and services to the price of the basket in the base year (only occasionally does the ONS change the basket) whereas the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base year.

Real interest rate = Nominal interest rate – Inflation

Y=C+I+G+NX

Encourage saving and investment.
Encourage investment from abroad.
Encourage education and training.
Establish secure property rights and maintain political stability.
Promote free trade.
Promote research and development.