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When the prices of goods change

When the prices of goods change - , . .TheGDP

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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  expensive ones if they like them enough more than the less expensive ones. The GDP  deflator takes into account an infinite amount of substitution. That is, because the index  is a Paasche index where the basket of goods is flexible, the index reflects consumers  substituting less expensive goods for more expensive ones. The CPI, on the other hand,  takes into account zero substitution. That is, because the index is a Laspeyres index  where the basket of goods is fixed, the index reflects consumers buying the more  expensive goods regardless of the changes in prices. Thus, the GDP deflator method 
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