What is the difference between the consumer price index CPI

What is the difference between the consumer price index (CPI) and the GDP deflator? Which would be better to use if you want to measure whether your hourly earnings this year were higher than they were last year? Why?

Solution

Consumer Price Index (CPI) indicates the year-to-year change in the price of a fixed basket of goods most commonly purchased by consumers. GDP deflator indicates how much the nominal GDP differs from the real GDP because of change in price in the current year as compared to the base year. GDP deflator = Nominal GDP/Real GDP * 100. GDP deflator, therefore, takes into account the change in the price of all goods and services produced in an economy in a given year and not just a fixed basket of goods. This is the main difference between CPI and GDP deflator.

I will consider CPI to measure whether my hourly earnings this year were higher than last year. CPI considers a basket of goods only which are commonly purchased. Since I am not concerned about the price of all goods and services and only concerned about the basket of goods purchased by me, I will select CPI to compare the increase in my income.