GDP deflator vs CPI coverage.

• A. The CPI includes all goods and services produced domestically.
• B. The GDP deflator uses a fixed base year for all prices.
• C. The GDP deflator excludes services.
• D. The GDP deflator covers all domestically produced goods and services and uses a changing basket.

Answer: (D)

Coverage and how the basket is updated distinguish the GDP deflator from the CPI. The GDP deflator measures price changes for all final goods and services produced domestically and uses current-period prices and quantities, so the basket changes over time as what’s produced shifts. The CPI, by contrast, measures the cost of a fixed basket of goods and services purchased by households (including imports) and uses fixed weights from a base year.

So the best description is that the GDP deflator covers all domestically produced goods and services and uses a changing basket. The CPI is not limited to domestically produced goods and includes imports, and the GDP deflator does not fix the base year; it uses current prices. The GDP deflator does include services.