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CA Foundation · Business Economics · Determination of National Income

Which statement correctly distinguishes the GDP deflator from the Consumer Price Index (CPI)?

The GDP deflator covers all goods and services produced within the country, with a basket that changes with current output. CPI tracks a fixed basket bought by consumers, which can include imported items. The other statements reverse these coverage differences.

  1. AThe GDP deflator covers all domestically produced goods and services, while CPI covers a fixed basket bought by consumers, including imported goodsCorrect
  2. BThe GDP deflator uses a fixed basket of goods, while CPI uses the current year's output
  3. CThe GDP deflator includes prices of imported consumer goods, while CPI excludes them
  4. DThe GDP deflator is based only on consumer purchases, while CPI covers investment goods and government purchases

Explanation

The deflator reflects prices of everything produced domestically, including capital and government goods, and its basket changes with current output. CPI tracks a fixed consumer basket, which can include imports. The other options reverse these features.

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