Question

10. Consider the following transactions for the U.S economy. In each of the following case, determine the effects on the GDP Deflator and the CPI. That is will any of them increase, decrease or stays the same.

a. A French company that produces soccer balls in the United States and exports all of them and the price of the soccer balls increases.

b. Donkin Donuts lowers the prices of cappuccino

c. An American company that produces designer dresses in France and exports all of them into the United States. If the price of the designer dresses increases

d. Caterpillar raises the price of the industrial tractors it manufactures

Answer 1

Gdp deflator gets affected by the changes in prices of domestic production

Where as CPI takes into account the changes in consumption patterns , whether the production takes place in domestic nation or in the foreign.

A) affects CPI only, CPI rises.

B) both CPI & GDP deflator falls

C) GDP deflator rises, bcoz the products are exported not consumed domestically. So CPI unchanged.

D) both CPI & GDP deflator rises