Which statement about inflation measures is true?

• A. The CPI includes all goods and services produced domestically.
• B. The GDP deflator uses a fixed basket of consumer goods.
• C. The GDP deflator covers all domestically produced goods and services, while the CPI covers urban consumer goods with a fixed basket.
• D. The CPI accounts for foreign-produced goods.

Answer: (C)

Inflation measures differ in scope and weighting, so they can tell different price-change stories. The GDP deflator tracks prices for all goods and services produced domestically, including investments and government purchases, and it uses current-year quantities. That makes it a broad measure of domestic production’s price level and it excludes imports because they aren’t domestically produced. The consumer price index, by contrast, follows a fixed basket of goods and services purchased by urban consumers, with weights set from a base period. It includes imported goods because consumers buy them, and it focuses on what households pay for a representative set of consumer items rather than on overall domestic production. So the statement that the GDP deflator covers all domestically produced goods and services, while the CPI covers urban consumer goods with a fixed basket, accurately describes the two measures.