According to a report forwarded by the Reserve Bank of India, there was a fall in rate of inflation as measure

Question 15 of 75

Q. According to a report forwarded by the Reserve Bank of India, there was a fall in rate of inflation as measured by Consumer Price Index (CPI) on year-on-year basis to 5% from 8% in the previous year. Which of the following statements represents the situation?

(a) CPI has fallen

(b) CPI has risen at a rate lower than the preceding year

(d) None of the above

Nagaland NbseCBSE Class XII Board 2019Subjective· 1mImportance★★★★★

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Concept understanding — GNP Deflator Calculation

The GNP Deflator: From Everyday Intuition to Exam-Ready Concept

Imagine you earn ₹50,000 a month. Next year, your salary goes up to ₹55,000 — a 10% raise. Are you actually better off? Not if the price of everything you buy has also risen by 10%. Your nominal income went up, but your real purchasing power stayed the same.

This is exactly the problem the GNP Deflator solves — but for an entire country's output instead of your salary.

What the GNP Deflator Actually Measures

The GNP Deflator is a price index that measures the average change in prices of all final goods and services included in the Gross National Product (GNP). Unlike the Consumer Price Index (CPI) which tracks only a fixed basket of consumer goods, the GNP Deflator covers everything a country's residents produce — including machinery, government services, exports, and capital goods.

Note

The GNP Deflator is not based on a fixed basket. It uses the current year's composition of output. This means it automatically accounts for new goods and changing consumption patterns — something the CPI cannot do.

The Formula (NCERT Standard)

The NCERT textbook defines the GNP Deflator as:

\text{GNP Deflator} = \frac{\text{Nominal GNP}}{\text{Real GNP}} \times 100

Where:

Nominal GNP = GNP measured at current year prices (includes inflation)
Real GNP = GNP measured at base year prices (removes inflation)
The multiplication by 100 converts it into an index number

How It Works: A Step-by-Step Example

Suppose India produces only two things in a year: wheat and steel.

Step 1: Calculate Nominal GNP

Use current year prices × current year quantities for everything.

Step 2: Calculate Real GNP

Use base year prices × current year quantities for everything. This shows what the same output would have cost if prices hadn't changed.

Step 3: Apply the formula

If Nominal GNP = ₹120 lakh crore and Real GNP = ₹100 lakh crore, then:

\text{GNP Deflator} = \frac{120}{100} \times 100 = 120

This means the general price level has risen by 20% since the base year.

Why It Matters (and Where It Differs from CPI)

The GNP Deflator serves three critical purposes in macroeconomics:

Converting nominal to real values — If you know the deflator, you can "deflate" any nominal GNP figure to find real GNP:

\text{Real GNP} = \frac{\text{Nominal GNP}}{\text{GNP Deflator}} \times 100

Measuring economy-wide inflation — The percentage change in the GNP Deflator from one year to the next gives the inflation rate for all domestically produced goods and services.
Comparing across time — Without the deflator, comparing India's GNP in 1990 to 2024 would be meaningless because prices have changed so much.

Watch out

A common exam mistake: The GNP Deflator includes exports (since GNP includes what residents produce abroad) but excludes imports (since imports are not part of domestic production). CPI, by contrast, includes imported consumer goods. This is why the two indices can give different inflation rates.

The Key Insight NCERT Expects You to Know …

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The question is about the rate of change of CPI, not its absolute level. A fall in the inflation rate from 8% to 5% means prices are still rising, but more slowly. The correct statement is that CPI has risen at a rate lower than the preceding year — option (b).

The key concept here is the difference between level and rate of change. The Consumer Price Index (CPI) is a measure of the average price level. Inflation is the percentage change in CPI from one year to the next. So when the report says "inflation fell from 8% to 5%", it means the CPI is still increasing — just at a slower pace.

A common mistake is to confuse a fall in the inflation rate with a fall in the price level itself. That would be deflation, which is not what's described.

Let's break it down step by step.

Understand what the numbers mean.

Last year, CPI inflation was 8%. That means the CPI at the end of last year was 8% higher than at the end of the year before. This year, CPI inflation is 5% — so the CPI now is 5% higher than it was at the end of last year.
Compare the two years.

The CPI is still rising (since 5% is positive), but the rise is smaller than last year's 8% rise. So the CPI is increasing, but at a lower rate.
Evaluate each option.
- (a) CPI has fallen — This would mean the CPI is lower than last year, i.e., negative inflation (deflation). That's not the case here. …

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Q.According to a report forwarded by the Reserve Bank of India, there was a fall in rate of inflation as measured by Consumer Price Index (CPI) on year-on-year basis to 5% from 8% in the previous year. Which of the following statements represents the situation?

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