Suppose that the prices of Canadian-made medical products cause the CPI to increase by 2 percent, while all other prices remain the same. How much will the GDP deflator most likely increase by?

Question

Quizplus · Accepted Answer

The GDP deflator reflects the prices of all goods and services produced domestically, whereas the CPI reflects the prices of all goods and services bought by consumers, including imports. If only the prices of Canadian-made medical products increase, it will have a smaller effect on the GDP deflator than on the CPI, because the GDP deflator includes all goods and services, not just those bought by consumers. The exact increase depends on the share of these products in the overall economy, but it will be less than the increase in the CPI.

Suppose That the Prices of Canadian-Made Medical Products Cause the CPI