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An Argentinian economist pointed out that the inflation rate based on the PCE(personal consumption expenditures) deflator was higher than the inflation rate you calculated in part (b) based on the GDP deflator. Provide two possible explanations for this difference between the inflation rates calculated from the PCE deflatorversus the GDP deflator.

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Answer:

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Year       Nominal GDP   Real GDP

2019             100                    100

2020            105                     99

a) %change in nominal GDP = [(105 - 100) / 100] * 100 = 5%

%change in real GDP = [(99 - 100) / 100] * 100 = -1%

b) GDP deflator is = [Nominal GDP / Real GDP]. %change in GDP deflator = [(106.06 - 100) / 100] * 100 = 6.06%

c) Inflation calculated from GDP deflator and PCE is different because

- GDP deflator does not includes price increase of imported goods while PCE does.

- PCE measures change in price of goods which are generally consumed by consumers while GDP deflator includes all goods produced in an economy.

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