Question

Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.

a) Changes in consumer preferences for imported goods.
b) Shifts in government infrastructure spending.
c) Private sector wage negotiations.
d) Central bank interest rate adjustments.

Answer 1

Using the GDP deflator is more appropriate than the CPI when considering shifts in government infrastructure spending because it includes all domestically produced goods and services, thereby giving a more accurate measure of the actual changes in government spending and economic output.

Step-by-step explanation:

One situation where using the GDP deflator to convert from nominal to real values would be more appropriate than using the CPI is in the case of shifts in government infrastructure spending. The GDP deflator reflects the prices of all domestically produced goods and services, making it suitable to gauge the changes in real government spending which affects overall economic output. In contrast, the Consumer Price Index (CPI) measures changes in the price level of a basket of consumer goods and services purchased by households, thus it is more focused on consumer-facing goods and may not fully capture the scope of government projects that significantly include investment goods and services outside the consumer basket.