The consumer price index and the GDP deflator are two alternative measures of the overall price level.Which of the following statements about the two measures is correct?

Question

Quizplus · Accepted Answer

The two measures are constructed differently, with the CPI measuring the change in the price of a fixed basket of goods and services purchased by households, and the GDP deflator measuring the change in the prices of all goods and services produced in the economy. Therefore, a change in the price of Japanese-made televisions would be reflected in the CPI (if it is part of the basket) but not necessarily in the GDP deflator. The substitution bias applies more to the CPI than the GDP deflator, as the CPI does not fully capture the changes in consumer behavior in response to changes in relative prices. The two measures may not always indicate the same inflation rate due to differences in their construction and coverage of goods and services.

The Consumer Price Index and the GDP Deflator Are Two