Question

There are a number of statistics computed to measure the price level, such as the GDP deflator and the CPI. The choice of which of these measures to use depends in many cases on the specific question in which you are interested. For each of the following situations, state whether the CPI or GDP deflator is a more appropriate measure to use and explain why. 1. (5 pts) The government is interested in whether increases in defense spending are affecting the price level. 2. (5 pts)An economic consulting firm is investigating the impact on the aggregate price level of more computers and electronic technology used in production.

Answer 1

1)In this question the most appropriate measure to use CPI. CPI is used as an economic indicator to know the price level changes in the economy basing on inflation , change in government policies, business investment etc. CPI is used to measure the prices changes in an economy as the change in annual percentage of CPI help us to calculate inflation rate in the economy which helps the government to change policies basing on inflation rate.

2)In the question the appropriate measure to use is GDP deflator. GDP deflator is used to find the ratio of Nominal GDP to Real GDP where it shows the inflation or deflation of any country from a specific base year. GDP deflator is used to measure all the goods and services produced in a country for a price level. GDP deflator shows the changes in the consumption and investment in an economy by the people which helps us to understand the impact on economy.