An increase in the price of imported cameras is captured by the Consumer Prices Index (CPI) but not by the GDP deflator

Question

BlackTom AI · Accepted Answer

In this true/false item, we evaluate how two price indices respond to a change in the price of imported cameras.
Option 1: True. The CPI (Consumer Prices Index) includes a basket of goods and services purchased by consumers, and it includes imported items. Therefore, an increase in the price of imported cameras would raise the CPI because those cameras are part of the consumer basket and their higher price feeds into consumer price changes.
Option 2: False. The GDP deflator measures the price level of all domestically produced final goods and services, using the prices of domestically produced output. It excludes imports when calculating the deflator, since imports are not domestic production. Hence a rise in import prices (like cameras) does not directly impact the GDP deflator.
To summarize the distinction: CPI reflects consumer-facing prices including imports, while the GDP deflator reflects prices of domestically produced goods and ignores imports. The scenario described aligns with CPI rising and GDP deflator remaining unaffected, making the statement true.

An increase in the price of imported cameras is captured by the Consumer Prices Index (CPI) but not by the GDP deflator

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