During July 2012, BLS calculated that inflation was 0.05 percent. However, durin

Question

During July 2012, BLS calculated that inflation was 0.05 percent. However, during that same month, the Bureau of Economic Analysis (BEA) calculated that inflation was 0.03 percent. The BEA uses the GDP price index to determine the rate of inflation. Although both measures showed that inflation was positive during the month, the measure calculated by the BLS was higher than that by the BEA. Which of the answer choices best explains this discrepancy?

A. GDP price index includes goods and services produced by firms and governments. Thus, an increase in the production costs of firms are passed along in the form of higher consumer prices. On the other hand, the CPI includes only consumer goods and neglects the pricing effects of businesses and governments.

B. GDP price index includes goods and services produced domestically and internationally, whereas the CPI measures only those goods produced domestically.

C. CPI uses a fixed market basket of goods and services. When prices increase, consumers will search for lower alternatives. However, the CPI does not take this into account and assumes that the amount of goods and services purchased stays the same.

D. Both GDP price index and CPI measure inflation correctly; however, the CPI uses a smaller sample and thus has less error. Hence, the CPI yields the more accurate measure.

Explanation / Answer

A. GDP price index includes goods and services produced by firms and governments. Thus, an increase in the production costs of firms are passed along in the form of higher consumer prices. On the other hand, the CPI includes only consumer goods and neglects the pricing effects of businesses and governments.

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