Answer to Question #133244 in Macroeconomics for Mustaphakanapia

Question

Suppose you are a senator writing a bill to index social society and pensions. That is, your bill will adjust these benifit to offset changes in the cost of living. Will you use the GDP deflator or the CPI? Why?

Answer 1

At first, for instance, telling between GDP deflator and CPI might pose a challenge to one who may want to believe the two measures the same thing. However, there happen to be critical differences as the GDP deflator tends only to include goods domestically produced, excluding any foreign goods.  CPI, on the other hand, consists of both foreign-produced goods and domestically produced. The GDP deflator again includes all pricings for goods and services as CPI only has goods purchased by consumers.  

Writing a bill, therefore, meant to counterbalance the cost of living changes, the use of both GDP deflator and CPI should take count. Inclusivity of both measures, therefore, is necessary since consumers within an economy do not entirely rely on locally produced goods alone. CPI, therefore, qualifies since it has within its scope the measure of goods made from abroad. GDP deflator intervenes where it has within its span for count not only goods bought by the consumer but includes as well services rent, which forms a crucial part cost of living for individuals. (Church, 2016)

References.

Church, J. D. (2016). Comparing Consumer Price Index with Gross Domestic Price Index and Gross Domestic Product Implicit Price Deflator. Monthly Lab. Rev., 139, 1.