For each of the following situations, state whether CPI or GDP deflator is a more appropriate...
For each of the following situations, state whether CPI or GDP deflator is a more appropriate measure to use and explain why the statistic is preferred.
1) You are interested in looking at the impact of higher prices of imported oil in the overall cost of living.
2) The government is interested in whether increases in defense spending are affecting the price level.
Homework Answers
1) CPI is preferred because CPI includes the goods and services consumed by the consumers irrespective of where the good is produced.
2) GDP deflator is preferred because CPI fixes the basket of goods and services consumed whereas GDP deflator includes defense spending.
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