Question

A Japanese company produces biscuits in Australia and exports all of them to China. If the price of the biscuits increases, then:
the GDP deflator and the CPI both increase
the GDP deflator increases and the CPI is unchanged
the GDP deflator is unchanged and the CPI increases
the GDP deflator and the CPI are unchanged

Answer 1

Answer: Option(B) is correct.

Explanation:

Exports is a component of GDP, therefore, GDP deflator also includes exports. Hence, if there is an increase in the price of biscuits that is produced by the Japanese company, then as a result the price of exports increases. Therefore, GDP deflator increases and CPI remains unchanged because CPI is only affected by the changes in price of goods and services that are consumed domestically not internationally.