Gross domestic product (GDP) measures the income of everyone in the economy and, equivalently, the total expenditure on the economy’s output of goods and services.
Nominal GDP values goods and services at current prices. Real GDP values goods and services at constant prices. Real GDP rises only when the amount of goods and services has increased, whereas nominal GDP can rise either because output has increased or because prices have increased. The GDP deflator is the ratio of nominal to real GDP and measures the overall level of prices.
GDP is the sum of four categories of expenditure: consumption, investment, government purchases, and net exports. This relationship is called the national income accounts identity.
The consumer price index (CPI) measures the price of a fixed basket of goods and services purchased by a typical consumer relative to the same basket in a base year. Like the GDP deflator and the personal consumption expenditure (PCE) deflator, the CPI measures the overall level of prices, but unlike the deflators, it does not allow the basket of goods and services to change over time as consumers respond to changes in relative prices.
The labor-