The consumer price index and the GDP deflator are two alternative measures of the overall price level.Which of the following statements about the two measures is correct?
A)The two measures are constructed differently,but they always indicate the same inflation rate.
B)The substitution bias applies equally to both measures.
C)A change in the price of Korean televisions is reflected in the U.S.consumer price index but not in the U.S.GDP deflator.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

The consumer price index includes the prices of consumer goods and services, while the GDP deflator reflects the prices of all goods and services produced domestically, including those not consumed domestically. Therefore, a change in the price of Korean televisions would be reflected in the CPI (if they are imported and consumed in the US) but not in the GDP deflator. A and B are incorrect because the inflation rates measured by the two indexes can differ due to differences in their construction and coverage.

The Consumer Price Index and the GDP Deflator Are Two