A Brazilian company produces soccer balls in Canada and exports all of them. If the price of the soccer balls increases, what happens to the GDP deflator and the CPI?

Question

Quizplus · Accepted Answer

The GDP deflator reflects the prices of all domestically produced goods and services in an economy, so if a Brazilian company produces soccer balls in Canada, this production is part of Canada's GDP, and an increase in the price of these soccer balls would increase the GDP deflator. However, the Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Since these soccer balls are exported and not sold domestically, they would not be part of the consumption basket used to calculate the CPI in Canada, leaving the CPI unchanged.

A Brazilian Company Produces Soccer Balls in Canada and Exports