Question

Suppose that the prices of wine imported from Chile rose from the base year. Which is the most accurate statement about the CPI and the GDP deflator?

1.Both the GDP deflator and the CPI rise.

2.The CPI rises but not more than the rise of the GDP deflator.

3.Insufficient information to tell anything about either GDP deflator or CPI

4.The GDP deflator rises but the CPI does not change.

Answer 1

Answer is all options are false

CPI includes the prices of all goods are actually consumed by the consumers, so the good could be domestically produced or imported .

Thus CPI will include foreign imported wines , hence CPI will rise,

so 3) & 4) are false

Now GDP deflator is a price index, as like CPI , but unlike CPI, it only includes the prices of domestically produced goods only,

so as imported wine is not produced in domestic geographical boundaries, then it will not be included in GDP deflator.

so GDP deflator will remain unchanged.

so 1) is false

2) implies that GDP deflator rises more than rise of CPI, which is not true

so all options are false