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Unformatted text preview: Let's say that a major disease spreads throughout the country and kills all of the cows. By dramatically limiting supply, this happenstance would cause the price of beef products to jump substantially. As a result, people would stop buying beef and purchase more chicken instead. However, given this situation, the GDP deflator would not reflect the increase in the price of beef products, because if very little beef was consumed, the flexible basket of goods used in the computation would simply change to not include beef. The CPI, on the other hand, would show a huge increase in cost of living because the quantities of beef and milk products consumed would not change even though the prices shot way up. When the prices of goods change, consumers have the ability to substitute lower priced goods for more expensive ones. They also have the ability to continue buying the more goods for more expensive ones....
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- Fall '10