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 (a. value of all goods and services produced in the economy in the base year, b. value of all goods and services produced in the economy this year, c. cost of a given market basket of goods and services) using (a. the base year’s prices, b. this year’s prices) by the (a. cost of a given market basket of goods and services, b. value of all goods and services produced in the economy in the base year, c. value of all goods and services produced in the economy this year) using (a. this year’s prices, b. the base year’s prices) and multiplying by 100. However, the CPI reflects only the prices of all goods and services (a. bought by consumers, b. produced domestically) .
Indicate whether each scenario will affect the GDP deflator or the CPI for the United States. Check all that apply.
| Scenario | Shows up in the… | ||
|---|---|---|---|
| GDP Deflator | CPI | ||
| A decrease in the price of a Scandinavian-made furniture that is popular among U.S. consumers | |||
| An increase in the price of a Smooth Streets Industries pothole puncher, which is commercial construction equipment made in the U.S. but not bought by U.S. consumers |
