Topic 2: Price & Quantity Indexes

Question 1

Laspeyres Index

Answer 1

CPI measure, using the base year as weights. So unchanging weights.

Question 2

What is the coverage of the CPI?

Answer 2

Imports but not exports

Question 3

How does the GDP deflator operate?

Answer 3

Measure the current output with the base years prices. This is real GDP. The output in current prices is nominal GDP. The GDP deflator is the ratio of nominal to real GDP.

Question 4

Show the weights for the GDP Deflator. Do they change? What kind of index is the GDP Deflator?

Answer 4

They do change with each year.

It is a Paasche index.

Question 5

How does the GDP deflator deal with intermediate goods?

Answer 5

They are netted out when calculating real & nominal GDP.

Question 6

What is the difference between the GDP Deflator and CPI?

Answer 6

CPI covers all goods in final consumption. (C_h+ M), excluding exports.

The GDP Deflator covers all goods produced (C_h + X + I + G) -> exludesk imports.

Question 7

What is the role of the CPI?

Answer 7

Normally to examine welfare changes from a change in price levels – showing us the exact income change that would be equilelent to the change in prices, allowing consumers to purchase the same amount of real goods or services.

Question 8

Deficiencies with the CPI

Answer 8

Uses fixed weights, so can’t take into account prefrence changes, substitution.
The addition and deletion of goods or services.

Quality changes are not well acounted for.

Question 9

Why is the GDP deflator useful?

Answer 9

It si an index of producer rather then consumer prices, so influences employment.