Price Indexes
On the basis of given passage answer the following questions:
There is another way to measure change of prices in an economy which is known as the Consumer Price Index (CPI). This is the index of prices of a given basket of commodities which are bought by the representative consumer. CPI is generally expressed in percentage terms. It is worth noting that many commodities have two sets of prices. One is the retail price which the consumer actually pays. The other is the wholesale price, the price at which goods are traded in bulk. These two may differ in value because of the margin kept by traders. Goods which are traded in bulk (such as raw materials or semi-finished goods) are not purchased by ordinary consumers.
Like CPI, the index for wholesale prices is called Wholesale Price Index (WPI). In countries like USA it is referred to as Producer Price Index (PPI). Notice CPI (and analogously WPI) may differ from GDP deflator because the goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. CPI includes prices of goods consumed by the representative consumer, hence it includes prices of imported goods. GDP deflator does not include prices of imported goods. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator.
Which of the following goods prices are not included in GDP Deflator?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Imported goods
Note: The given answer is as per the official NTA Answer Key. However, the question can have more than one correct answer, i.e. both Option (3) and Option (4), as explained below.
GDP measures the final goods and services produced within the country. Dividing GDP at current prices by GDP at base-year prices gives the GDP deflator, the ratio of nominal to real GDP. Both are sums over the country’s own final output, so the deflator follows the prices of that output and of nothing else.
Imported goods are left out because they are produced abroad. The passage draws the line against the CPI: “CPI includes prices of goods consumed by the representative consumer, hence it includes prices of imported goods. GDP deflator does not include prices of imported goods.” An imported good enters the consumer’s basket, and so the CPI, but it is not part of the country’s GDP. This is Option (4).
Intermediate goods are left out as well. GDP counts final goods only, because the value of the final goods already includes the value of the intermediate goods that went into them, and counting them again would be double counting. Nominal and real GDP are both sums over final goods, so the prices of intermediate goods do not enter the GDP deflator as separate items. This is Option (3).
The other options
Option (1) Domestic goods — Included (Incorrect). Goods produced within the country are what GDP measures, so their prices are the very prices the deflator is built from. The passage says the GDP deflator takes into account all the goods produced in a country.
Option (2) Final goods — Included (Incorrect). GDP is the value of the final goods and services produced in a year, so final goods are the core of the GDP deflator. Nominal and real GDP are both sums over final goods, one at current prices and the other at base-year prices.
Option (3) Intermediate goods — Not included. Should also be correct, though not the answer given by NTA. GDP counts final goods only, so intermediate goods stay outside GDP and outside its deflator, as worked out above.
Tip for students: In a passage-based question, look first for the sentence of the passage that answers it. Here the passage names imported goods as the ones the GDP deflator leaves out, and that is the answer in the official key.
NCERT (2025-26): “2.1 Some Basic Concepts of Macroeconomics … But why are we to measure final goods only? Surely intermediate goods are crucial inputs to any production process and a significant part of our manpower and capital stock are engaged in production of these goods. However, since we are dealing with value of output, we should realise that the value of the final goods already includes the value of the intermediate goods that have entered into their production as inputs. Counting them separately will lead to the error of double counting.… 2.4 Nominal and Real GDP … The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator.… …Notice CPI (and analogously WPI) may differ from GDP deflator because 1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. 2. CPI includes prices of goods consumed by the representative consumer, hence it includes prices of imported goods. GDP deflator does not include prices of imported goods.…” |