Question

2. Alternative price indexes 

Because there isn't one single measure of inflation, the government and researchers use a variety of methods to get the most balanced picture of how prices fluctuate in the economy. Two of the most commonly used price indexes are the consumer price index (CPI) and the GDP deflator. 

The GDP deflator for this year is calculated by dividing the _______ using _______  by the _______ using and multiplying by 100. However, the CPI reflects only the prices of all goods and services _______.

Indicate whether each scenario will affect the GDP deflator or the CPI for the United States. Check all that apply. 

An increase in the price of a Chinese-made car that is popular among U.S. consumers.

A decrease in the price of a Treewood Equipment feller buncher, which is a commercial forestry machine made in the U.S but not bought by U.S. consumers.

Answer 1

Blank 1) nominal GDP

Blank 2) using the value of goods and services valued at current prices

Blank 3) real GDP

Blank 4) using the value of goods and services within an economy valued at constant prices (choosing a base year)

Blank 5) as they(prices) change for each item in the basket of goods and services

An increase in the price of a Chinese-made car that is popular among US consumers will impact the CPI as it is purchased by the domestic consumers. It will also affect the GDP deflator as it impacts to the GDP of the country as imports.

A decrease in price of a machine not bought by US consumers won't affect the CPI. But it will affect the GDP deflator as it is made in the US, so it will add to the value of goods and services produced in the US (maybe, also exported).