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Inflation measurements and military goods

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The price on military goods becomes cheaper due to a change in technology. Depending on how inflation is measured, explain why and why not the change in the price of military goods will be reflected in how the United States measures inflation.

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Solution Summary

When the price of military goods declines, the effect on inflation measurements will vary depending on which one is used.

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The primary measurements of inflation are the CPI, PPI, and the GDP deflator.

The CPI measures the average price of a fixed set (or basket) of goods and services. The basket of goods is intended to reflect all of the items a typical family buys to achieve some minimum standard of living in some base period (currently, 1982-1984). The basket is adjusted every ten years or so. The CPI does not count the price of each item equally but weights each according to its share of total household expenditures in the base period, so that changes in the index from one period to the next are broadly reflective of changes in a representative household's current cost of living. The weightings are determined from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Consumer Expenditure Survey over the two years 2001 and ...

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