Answer to Question #118662 in Macroeconomics for Karan Bhanot

Question

What will happen to the GDP deflator and CPI of America if the price of steel produced in India and sold to America goes up? Explain properly within 100 words

Answer 1

The GDP deflator measure price change from the perspective of domestic production of good and services and thus pertain to goods and services purchased by consumers, businesses, government, and foreigners, but not importers. Therefore there will be no effect in America GDP deflator because the steel is imported from India.

On the other hand, CPI measures the prices of only the goods and services bought by consumers therefore, the increase in steel price will have an effect on the American CPI because the steel is bought by American consumers.