Which of the following statements is correct?

Question

Which of the following statements is correct?

BlackTom AI · Accepted Answer

The question asks which statement is correct regarding inflation measures and their uses. 
Option 1: 'The GDP deflator better reflects the goods and services bought by consumers than does the CPI.' This is imprecise. The CPI is designed to measure changes in the cost of living for a typical consumer and reflects out-of-pocket spending on goods and services bought by households, whereas the GDP deflator covers all goods and services produced domestically and can differ from consumer basket changes. Saying it better reflects consumers' purchases is not accurate. 
Option 2: 'The percentage change in the CPI is a measure of the inflation rate, but the percentage change in the GDP deflator is not a measure of the inflation rate.' Both measures are commonly used as indicators of inflation. The CPI percentage change is a measure of consumer price inflation, while the GDP deflator percentage change is also a measure of price inflation for all domestically produced goods and services in the economy. Therefore this statement is incorrect because it wrongly implies the GDP deflator’s change isn’t an inflation measure. 
Option 3: 'The CPI can be used to compare dollar figures from different points in time.' This is true. The CPI can be used to adjust for price level changes when comparing nominal amounts across years, i.e., to convert to real dollars. Misuse would be to compare nominal values without adjustment, but the intended use of the CPI includes deflating for inflation to make cross-time comparisons. 
Option 4: 'Compared to the CPI, the GDP deflator is the more common gauge of inflation.' In practice, the CPI is more commonly cited as the measure of consumer price inflation, while the GDP deflator is another broad price index. Therefore this statement is false because the CPI is the more widely cited gauge of inflation for consumers. 
The reasoning above shows that Option 3 is the correct use of CPI for cross-year dollar comparisons, while the other options contain common misconceptions about what each index measures or how they are used. There are subtle distinctions among the indices: the CPI targets consumer out-of-pocket costs, the GDP deflator encompasses overall domestic production, and both can indicate inflation, but their typical applications differ.

Which of the following statements is correct?

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