Question 2 Chapter 11 Alternative price indexes Solution
Any price index compares the amount something would cost in a given year to the amount it would
... [Show More] cost in the base year, a benchmark
year that serves as a basis for comparison for prices in other years. In the case of the GDP deflator, the something being compared is the
value of all goods and services produced in the economy this year:
However, the CPI measures the overall cost of goods and services purchased by a typical consumer. There are many types of domestically
produced goods, such as tanks and commercial jets, that are not purchased by the typical consumer. There are also many foreign goods
and services, such as foreign cars and clothing, that are purchased by domestic consumers. To accurately measure consumer prices, the
government must filter out many types of domestically made products and include many types of foreign-made products.
Explanation: Close Explanation
The decrease in the price of the Chinese-made television will show up in the U.S. CPI because it reflects the prices of products purchased
by typical U.S. consumers. The price change will not affect the GDP deflator because the GDP deflator reflects the prices of domestically
produced goods and services.
The increase in the price of the forestry equipment will show up in the GDP deflator because the deflator reflects the prices of all
domestically produced products. The price change will not impact the consumer price index because commercial forestry equipment is not
bought by a typical U.S. consumer.
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
by 100. However, the CPI reflects only the prices of all goods and services
using
using
.
by the
and multiplying
Points: 1 / 1
Indicate whether each scenario will affect the GDP deflator or the CPI for the United States. Check all that apply.
Shows up in the...
GDP
Scenario Deflator CPI
An increase in the price of a Treewood Equipment feller buncher, which is a commercial forestry machine that cuts
and stacks trees
A decrease in the price of a Chinese-made television that is popular among U.S. consumers
Points: 1 / 1 [Show Less]