If the price of American-made power tools increases, then?

January 1, 2010 by admin · 2 Comments
Filed under: Economics 
power tools
Chelsea asked:

a. the consumer price index and the GDP deflator will both increase.

b. the consumer price index will increase, and the GDP deflator will be unaffected.

c. the consumer price index will be unaffected, and the GDP deflator will increase.

d. the consumer price index and the GDP deflator will both be unaffected.

test question! :/

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Comments

2 Responses to “If the price of American-made power tools increases, then?”
  1. jekin says:
    January 4, 2010 at 10:51 pm

    I don’t know what GDP means, but american tools prices have kept me from having a lot of things. Now I can afford a lot of tools I really need because they are made in china and just as good if not better. in other words the unions, govt. regulation and minimum wages are going to drive our economy down the toilet.while china makes a profit and has enough money to buy our industry and run them in a way that will make a profit. If you work for one of those industries, you may be expected to do something once in a while. jekin

  2. Arbie says:
    January 5, 2010 at 3:45 am

    Is “none of the above” a possibility?

    This is one of those typical questions where a positivistic student of economics has not considered all of the possible outcomes and asks the question with a secret bias.

    Prices are complex and can change — up or down — for all sorts of reasons. I recall once, during the Carter stagflation, when an investment adviser told his clients to invest in silver. One client took that to mean buy stock in a silver mine. Subsequently, there was a fire at the mine, and production was curtailed. Due to the reduced supply of silver, the price of bullion went up, but the mining stock took a bath.

    In this situation, a change in a commodity price had nothing to do with inflation. The rise in the price of the precious metal reflected a temporary shortage in its supply, primarily for industrial purposes. The price increase would have been reflected in the CPI as 0, since somewhere in the economy, prices fell to compensate.

    Of course, a deliberate policy of government crime will inflate the money supply (by making more of it), and this eventually will result in higher prices generally. In such circumstances, the CPI goes up, which limits us to “a” and “b.” But, since there is no social utility to a change in the money supply, “b” cannot be the answer because, to the extent that diffusion shifts are ignored (permissible at the macro level), no one is better off. Inflation does not change the amount of goods produced; it only shrinks the financial “inches” used to measure them.

    “A” is the least worst choice. Arbie

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