Question

1.State the distinction between the consumer price index (CPI) and the GDP price index

Answer 1

Inflation measurements in the U.S. economy are the Consumer Price Index ( CPI), the price index of the gross domestic product ( GDP) and the implicit deflator. The CPI measures the changes of the price of goods and services bought from urban consumers, whereas the GDP and implicit price fluctuation index measure changes in the prices of goods and services bought by consumers, businesses , governments and other countries but not importers. So, every one you use is based on your intent in a given scenario.

The CPI is a measure of how long the pricing of a constantly goods and services market basket paid by urban consumers, a sample of goods and services that consumers buy for everyday use, changes over time. The prices of each item in the market basket weighed on a monthly basis by the CPI based on expenditures reported by a sample of families and individuals.

In short, the CPI is a price change measure for a series of goods and services purchased by urban consumers and is calculated with a combination of geometric and arithmetic means capturing a certain degree of consumer substitution limited to goods and services in the product categories.

The GDP price index like the CPI, measures price changes for consumer goods and services, as well as price changes for goods and services that companies, governments and foreigners purchase. Unlike the CPI, however, the price change for GDP imports does not apply to the price index.

Alternatives to inflation in the United States economy are the CPI and GDP price index and the implied price deflator. The decision as to which to use in a given scenario depends probably on the number of products and services that you are interested in as a measure of price change. The CPI measures price changes from an urban consumer's perspective and therefore concerns the goods and services that urban consumers have purchased out of the pocket. The price index for GDP and the deflator measure measure price changes from the point of view of domestic goods and services and thus applies to goods and services purchased by consumers, companies, government and foreigners, but not importers.