Question

An increase in the price of imported goods will show up in:

both the CPI and the GDP deflator.
neither the CPI nor the GDP deflator.
the CPI but not in the GDP deflator.
the GDP deflator but not in the CPI.

Answer 1

The correct answer is letter "C": the CPI but not in the GDP deflator.

Step-by-step explanation:

A deflator measures the changes in the value of money in relationship with fluctuations in prices and production. The main difference between the CPI (Consumer Price Index) deflator and the GDP (Gross Domestic Product) deflator is that the first measures the price of goods and services bought by consumers whether imported or not while the second measures the prices of all goods and services produced domestically.

Thus, if imported products increase in price the CPI deflator will take it into account but not the GDP deflator.

Answer 2

Answer: c) The CPI but not in the GDP deflator.

Explanation: A GDP deflator is a measure of the level of prices of all new, domestically produced finally goods. It is calculated by dividing the nominal GDP by the real GDP.

A Consumer Price Index on the otherhand measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households

The major difference between the CPI and GDP deflator is thay they Reflect a different set of prices. The GDP deflator does not include changes in the price of imported goods, while the CPI does not account for changes in the price of exported goods.