Question

the gdp delfator cannot be higher than the consumer price index

true or false

Answer 1

Answer: True

This is because the substitution of goods when they become relatively cheaper, is not considered by the consumer price index.

Both GDP deflator and consumer price index are indicators of price level in an economy.

Suppose, when the prices of goods increases, the price of one good ( even though it is expensive ) compared to other goods increases relatively less. So the consumer will use that good as a substitute to other good whose price have increased relatively higher. In the calculation of consumer price index this effect is not taken into consideration. On the other hand GDP deflator do account this. This is because GDP deflator is related with all the goods produced in an economy on the other hand consumer price index is based on the consumers choice of goods.