Question

ECO - 252 Macroeconomics

9. For each of the following, decide if the increase in price of the following goods will be reflected in the U.S. GDP deflator and / or the CPI or neither.

a. Australian-made shoes imported into the United States.

b. Domestically-produced industrial robots.

c. Tractors imported into the United States from Russia.

d. Dairy products produced domestically.

e. Imported olive oil produced by a U.S. company in Spain.

f. A fighter jet bought with the national defense budget.

Answer 1

GDP Deflator is the ratio of nominal GDP (that values current output at current year prices) to real GDP (that values current output at base year prices). Based on GDP, this excludes imported goods. CPI is based on the cost of a fixed basket of goods and services consumed by typical households over different periods. This includes imported goods but excludes the components of GDP that are not purchased by typical households. Therefore:

(a) Reflected in CPI

(An imported good purchased by households)

(b) Reflected in GDP Deflator

(Industrial robots are not household goods but are included in GDP as Investment)

(c) Reflected in Neither

(Tractors are not household goods, and imported tractors are excluded from GDP)

(d) Reflected in Both

(e) Reflected in CPI

(An imported good purchased by households)

(f) GDP Deflator

(Fighter jets are not household goods but are included in GDP as Government spending)