In macroeconomics, which of the following ratios is commonly known as the GDP deflator and is used to measure the overall price level in an economy?

Introduction / Context:
The GDP deflator is an important price index used in macroeconomic analysis. It links nominal GDP, which is measured at current prices, to real GDP, which is measured at constant prices. Examinations often ask you to identify the correct formula or ratio that defines the GDP deflator. This question tests that basic understanding.

Given Data / Assumptions:
- Four ratios are presented: nominal GDP to real GDP, nominal GNP to real GNP, nominal CPI to real CPI and real GNP to nominal GNP.
- The task is to select the ratio that corresponds to the GDP deflator.
- It is understood that the deflator is usually expressed as an index value multiplied by 100.

Concept / Approach:
Nominal GDP measures the value of final goods and services produced in an economy at current year prices. Real GDP measures the same quantity of goods and services valued at prices of a base year. The GDP deflator shows how much of the change in nominal GDP from the base year to the current year is due to changes in prices rather than changes in quantities. It is defined as GDP deflator = (nominal GDP / real GDP) * 100. This definition immediately points to the correct ratio in the options.

Step-by-Step Solution:
Step 1: Examine option A, ratio of nominal GDP to real GDP. This matches the standard formula for the GDP deflator. Multiplying this ratio by 100 gives the index value.Step 2: Examine option B, ratio of nominal GNP to real GNP. While a similar ratio could be defined as a GNP deflator, the question specifically asks about the GDP deflator, not GNP deflator, so this option is not correct.Step 3: Examine option C, ratio of nominal CPI to real CPI. The Consumer Price Index is already an index number and is not normally expressed in nominal and real forms, so this ratio does not make sense in standard usage.Step 4: Examine option D, ratio of real GNP to nominal GNP. This inverts the required direction and uses GNP instead of GDP, so it cannot be the GDP deflator.

Verification / Alternative check:
You can verify the concept with a simple example. Suppose nominal GDP in the base year is 100 and real GDP is also 100, so the GDP deflator is (100 / 100) * 100 = 100. In a later year, if nominal GDP is 150 and real GDP is 120, the GDP deflator is (150 / 120) * 100 = 125. This means the overall price level has increased by 25 percent relative to the base year. This calculation clearly uses the ratio of nominal to real GDP, confirming the correct option.

Why Other Options Are Wrong:
Option B is wrong because it relates to GNP and would define a GNP deflator, not the GDP deflator. Option C is wrong because CPI is a separate price index and is not constructed from a nominal to real ratio in this way. Option D is wrong both because it uses GNP and because it inverts the ratio, which would give the reciprocal of the deflator.

Common Pitfalls:
Students sometimes confuse GDP with GNP and may hastily choose an option involving GNP. Another common error is to forget which variable goes in the numerator and which in the denominator. Remember that nominal values are always at current prices and real values are at constant prices, and that the deflator shows how much higher nominal GDP is compared with real GDP due to price changes.

Final Answer:
The GDP deflator is defined as the Ratio of nominal GDP to real GDP, usually multiplied by 100.