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How CPI and the GDP deflator differ

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1. How do the CPI and the GDP deflator differ? Why do economists believe that the CPI overstates the rate of inflation? Is this an important problem?

2. What is the connection between an increase in government purchases and the trade deficit? (Explain how the former affects the latter.)

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Government purchases and the trade deficit; how inflation measures differ and their accuracy

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The CPI measures the change in the price of a basket of goods purchased by the typical urban consumer. These goods can be imported or made domestically. However, the GDP deflator includes only those good produced domestically, since it is tied to gross domestic product. In addition, while the CPI is a fixed-weight index, the GDP deflator also measures many goods, not just a single basket. This gives it an advantage in capturing over changes ...

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