2. There are a number of statistics computed to measure the price level, such as
ID: 1167842 • Letter: 2
Question
2. There are a number of statistics computed to measure the price level, such as the GDP deflator and the CPI. The choice of the measures to use depends in many cases on the specific question in which you are interested. For each of the following situations, state whether the CPI or GDP deflator is a more appropriate measure to use and explain why the statistic is preferred.
a.You are interested in looking at the impact of higher prices of imported oil in the overall cost of living.
b.The government is interested in whether increases in defense spending are affecting the price level.
c.An economic consulting firm is investigating the impact on the aggregate price level of more computers and electronic technology used in production.
Explanation / Answer
a.
Use of CPI will be good fit.
Explanation:
Consumer price index (CPI) takes all products and services that are being consumed by the consumers. It also include imported goods. In contrast to it, GDP deflator does not include imported goods such as imported oil. Thus, it is the CPI that can answer the stated issue in the problem.
b.
Use of GDP deflator will be good fit
Explanation:
Defense spending is not considered in CPI because it is not consumed by ordinary consumers. Though, GDP deflator considers it. Thus, GDP deflator can be used to measure the impact.
c.
Use of GDP deflator will be good fit
Explanation:
CPI only considers goods / services consumed by consumers. It never considers intermediate goods that are being used in production or business purpose.
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