Question

Which of the following is correct?

- The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.
- The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.
- The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.
- The GDP deflator is more commonly used as a gauge of inflation than the CPI is.

Answer 1

Option (B) is correct.

Step-by-step explanation:

Gross domestic product (GDP) deflator determines the prices of all the good and services produced within the nation whereas consumer price index (CPI) calculates the price of goods and services that are bought by the consumers.

GDP deflator only includes the goods and services that are produced domestically which means that it doesn't include imported goods but in case of CPI, it includes the price of all the imported goods that are bought by the consumers.

Therefore, above are the reasons why CPI is better than GDP deflator at indicating the prices of the goods and services that are bought by the consumers of a nation.