The CPI differs from the GDP deflator in that[Fill in the blank]

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The question asks: The CPI differs from the GDP deflator in that [Fill in the blank].
Option a: substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
This is misleading. Substitution bias is indeed a problem for the CPI because it uses a fixed basket of goods, making it less responsive to changes in relative prices; the GDP deflator, by using a variable basket that reflects current production, does not suffer from substitution bias in the same way. So this statement is incorrect.
Option b: increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator.
This is false. The CPI is designed to measure consumer prices for goods and services purchased by urban consumers, regardless of who buys them, and the GDP deflator measures prices of all domestically produced final goods and services. Transactions with the government are not the defining distinction here. Therefore, this option is incorrect.
Option c: increases in the prices of foreign produced goods that are sold to domestic consumers show up in the CPI but not in the GDP deflator.
This statement captures a key difference. The CPI includes many imported goods in its basket, so imported (foreign-produced) items influence the CPI. In contrast, the GDP deflator includes only goods and services produced domestically, so foreign-produced goods sold to domestic consumers do not affect it. This is the correct distinction.
Option d: the CPI is a price index, while the GDP deflator is an inflation index.
Both the CPI and the GDP deflator are price indices used to measure inflation in different contexts; the CPI is not a separate inflation index in a methodological sense, and this characterization is not the defining difference between them. Hence this option is not accurate.
In summary, option c accurately states the fundamental difference: the CPI includes prices of imported goods consumed domestically, whereas the GDP deflator excludes foreign-produced goods since it focuses on domestically produced final goods and services.

The CPI differs from the GDP deflator in that[Fill in the blank]

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