The CPI and the GDP deflator

Question

BlackTom AI · Accepted Answer

The prompt asks about the relationship between two price level measures: the CPI and the GDP deflator. 
Option a: 'always show identical changes.' This is unlikely because the CPI and GDP deflator are constructed from different baskets of goods and services, weights, and coverage. The CPI uses a fixed basket of consumer goods, while the GDP deflator covers all goods and services produced domestically and changes over time with production patterns. Thus, they do not always change identically. 
Option b: 'generally show different patterns of movement.' While there can be differences due to basket composition and coverage, in practice over long horizons they tend to move together since both are measures of inflation in the economy and respond to common macroeconomic forces (like monetary policy, demand shifts, and overall price levels). However, saying they generally show different patterns exaggerates the typical relationship; there is a strong tendency toward concordance rather than persistent divergence. 
Option c: 'always show different patterns of movement.' This is incorrect because the two indices are not designed to move in opposite directions on a consistent basis; while there may be short-term discrepancies, the overarching movements usually align due to shared macroeconomic drivers and common price pressures in the economy. 
Option d: 'generally move together.' This option captures the common empirical observation that both the CPI and the GDP deflator respond to similar inflationary forces and tend to rise or fall in tandem over time, despite their methodological differences. The differences in their construction explain why they might diverge occasionally, but the prevailing pattern is co-movement across periods. 
In summary, recognizing the definitional and methodological distinctions helps explain why option a and c are too strong in asserting identical or always-different movement, and option b overstates divergence. The typical, broad pattern aligns with option d, reflecting their general tendency to move together.

Econ 13 Ch 10 (Inflation) homework

The CPI and the GDP deflator

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