Question

In each scenario, determine the effects on the decrease or unchanged? China's CPI and China's GDP deflator, increase. (1) A Chinese coffee shop raises the price of coffee within China. (2) A Chinese factory raises the price of the industrial tractors sold both in China and abroad. Armani raises the price of the Italian jeans it sells in the China. erman company lower the price of weapons sold to Chinese government.

Answer 1

Answer

1) GDP deflator = (Nominal GDP / Real GDP)*100

As Price of Coffee within china increases Nominal GDP will increase and real gdp will remains same and hence GDP deflator of China will increase.

Also, Price of Coffee within china increases then Price of basket that includes coffee will increase and hence CPI of China will also increase

2) Similarly as above Increase in price of tractors produced in China will increase Nominal GDP and Price of basket that includes Industrial tractors will also increase. Hence Both GDP deflator and CPI of China will rise.

3) As GDP deflator takes into consideration only Goods and services produced in the country and not includes Imported goods. Hence, Increase in price of Armani jeans that it sells in China will not effect GDP deflator of China. But as increase in price of Armani jeans will result in increase in Basket of Goods containing Armani jeans in china and hence will result in Increase in CPI of China

4) Similarly as above. As GDP deflator takes into consideration only Goods and services produced in the country and not includes Imported goods. Decrease in price of Germany's weapon sold to china will not effect GDP deflator of China. Note that CPI as name suggest CONSUMER Price index only considers consumer goods and not government goods, hence Decrease in price of Germany's weapon sold to chinese government will not effect CPI of China.