Question

Consider the following statements and which of the following is/are NOT correct?

• A. Unlike some price indices (like the CPI), the GDP deflator is based on a fixed basket of goods and services.
• B. The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy.
• C. Like the consumer price index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year
• D. The GDP deflator of the base year itself is equal to 100.

Answer 1

The correct option is A Unlike some price indices (like the CPI), the GDP deflator is based on a fixed basket of goods and services.

In economics, the GDP deflator (implicit price deflator) is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. GDP stands for gross domestic product, the total value of all final goods and services produced within that economy during a specified period.
Like the consumer price index (CPI), the GDP deflator is a measure of price inflation/deflation with respect to a specific base year; the GDP deflator of the base year itself is equal to 100.
The nominal GDP of a given year is computed using that year's prices, while the real GDP of that year is computed using the base year's prices.
Unlike some price indices (like the CPI), the GDP deflator is not based on a fixed basket of goods and services. The basket is allowed to change with people's consumption and investment patterns.[Specifically, for the GDP deflator, the "basket" in each year is the set of all goods that were produced domestically, weighted by the market value of the total consumption of each good. Therefore, new expenditure patterns are allowed to show up in the deflator as people respond to changing prices. The theory behind this approach is that the GDP deflator reflects up to date expenditure patterns. For instance, if the price of chicken increases relative to the price of beef, it is claimed that people will likely spend more money on beef as a substitute for chicken.