Which of the following statements is/are correct? 1. GDP deflator captures the average price of an unchanging basket of commodities that constitutes the GDP of the country. 2. GDP deflator can be used to measure the real GDP of the economy but not the inflation rate. Select the correct answer using the code given below.
- (a)1 only
- (b)2 only
- (c)Both 1 and 2
- (d)Neither 1 nor 2
Correct — D, Neither 1 nor 2. Statement 1 fails on the word 'unchanging'. The GDP deflator is simply nominal GDP divided by real GDP, so its basket is whatever the economy actually produced in the current year, and its weights move every year with the pattern of output. NCERT draws the contrast in one line while comparing the deflator with the CPI — the weights are constant in the CPI, but they differ according to the production level of each good in the GDP deflator. A fixed basket is the hallmark of the CPI and the WPI, not of the deflator. Statement 2 fails on its second half. The deflator is a price index, and the percentage change in it from one year to the next is a perfectly good measure of inflation — one that covers every good and service produced in the country, which no consumer index does. Both statements are wrong, so the code is 'Neither 1 nor 2'.
- (a)1 only — Accepts the 'unchanging basket' claim. The deflator's basket is the current year's output and its weights shift with production every year; it is the CPI whose weights are held constant.
- (b)2 only — Accepts that the deflator cannot measure inflation. Its year-on-year percentage change is an inflation rate, and the deflator-based series is published for India alongside the CPI and WPI.
- (c)Both 1 and 2 — Both statements are individually false, so they cannot both be correct. Reject this as soon as either one is eliminated.
Nominal GDP values a year's output at that year's prices; real GDP values the same output at a fixed base-year set of prices. Because the quantities are identical in the two calculations, the ratio between them isolates the price change, and that ratio is the GDP deflator. NCERT states it directly — the ratio of nominal to real GDP is a well-known index of prices, and this is called the GDP deflator. It is usually written as a percentage by multiplying by 100.
The item is testing whether you know how the deflator differs from the CPI, and there are three standard differences worth carrying into the exam hall. The consumer basket does not cover everything a country produces, while the deflator takes in all goods and services. The CPI includes the prices of imported goods, whereas the deflator does not, since imports are not part of domestic production. And the CPI's weights are fixed while the deflator's move with output. A student who has learnt those three points answers this question and the next one in the same paper without hesitating. It is also worth being precise about the direction of the arithmetic: you do not get real GDP out of the deflator by itself, because the deflator is computed from real GDP in the first place; what you can do is use a known deflator to strip inflation out of a nominal series.
- GDP deflator = nominal GDP divided by real GDP, usually expressed as a percentage.
- Its weights change every year with the production level of each good; the CPI's weights are held constant.
- The deflator covers all goods and services produced domestically; the CPI covers only the consumer's basket.
- The CPI includes the prices of imported goods, the GDP deflator does not.
- The year-on-year change in the deflator is an inflation rate, and a GNP deflator can be constructed in the same way.
Statement 1 describes the CPI, not the deflator; statement 2 denies the deflator a use it plainly has.
- Reading 'unchanging basket' as a harmless description when it is the exact feature that separates the CPI from the deflator.
- Assuming a statement must be half-right because it names a real concept correctly before making a false claim about it.
- Forgetting that a code question can have every statement false — 'Neither' is a real answer, not a filler option.
Asked as a two-statement code item where both statements are false, testing the CPI-versus-deflator contrast rather than the definition alone.
In India, inflation is measured by the
- (a) Wholesale Price Index Number
- (b) Consumers Price Index for urban non-manual workers
- (c) Consumers Price Index for agricultural workers
- (d) National Income deflation
Answer(a) Wholesale Price Index Number
The deflator turns up here as option (d), 'National Income deflation'. Note carefully what that item settles and what it does not: it asks which series India used for headline inflation, and the answer then was the WPI. It does not say a deflator cannot measure inflation, which is the claim this CDS statement makes. One more thing has moved — since 2014 India's headline inflation has been reported on the Consumer Price Index, not the WPI.
CDS_GK_2021_I_Q12021Which one of the following statements is not correct?
- (a) Real GDP is calculated by valuing outputs of different years at common prices.
- (b) Potential GDP is the real GDP that the economy would produce if its resources were fully employed.
- (c) Nominal GDP is calculated by valuing outputs of different years at constant prices.
- (d) Real GDP per capita is the ratio of real GDP divided by population.
Answer(c) Nominal GDP is calculated by valuing outputs of different years at constant prices.
The two halves of the deflator, asked as definitions. That paper wanted you to know that real GDP uses common prices and nominal GDP uses current prices; this one wants the ratio between them. Do them together and the deflator stops being a formula to memorise.
- practice — not a real PYQ
If the nominal GDP of a country is 1,650 units and its real GDP is 1,100 units, the GDP deflator is
- (a)50 per cent
- (b)66 per cent
- (c)150 per cent
- (d)165 per cent
Answer(c) 150 per cent — 1,650 divided by 1,100 is 1.5, so prices are one and a half times the base-year level.
- practice — not a real PYQ
Which one of the following is true of the Consumer Price Index but not of the GDP deflator?
- (a)It is expressed in percentage terms
- (b)It includes the prices of imported goods
- (c)It can be used to measure inflation
- (d)It requires a base year
Answer(b) It includes the prices of imported goods — the deflator covers only domestically produced output.