In macroeconomics, the GDP price index (also called the GDP deflator) primarily measures changes in which of the following?

Introduction / Context:
Price indices are important tools in macroeconomics for measuring inflation and changes in the general price level. The GDP price index, often referred to as the GDP deflator, is one such measure. It is used to convert nominal gross domestic product into real gross domestic product and to capture how the prices of domestically produced goods and services change over time. This question asks what the GDP price index actually measures.

Given Data / Assumptions:

• Gross domestic product (GDP) is the value of all final goods and services produced within a country borders during a specific period.
• Nominal GDP is measured at current prices, while real GDP is measured at constant base year prices.
• The GDP price index is defined as nominal GDP divided by real GDP, multiplied by 100.
• We are concerned with prices of final output produced within the nation, not just imported goods or individual resources.
• The index is broad and covers all components of GDP.

Concept / Approach:
The GDP price index measures the average level of prices of all final goods and services produced domestically in a given period relative to a base year. It reflects how the overall price of the nation current output has changed, not the physical quantity of resources or solely the cost of inputs. By comparing nominal and real GDP, the deflator reveals the price change component of GDP growth. It is therefore broader than a consumer price index, which focuses on a fixed basket of consumer goods, and it does not directly measure the cost of resources such as labour or capital.

Step-by-Step Solution:
Step 1: Recall that nominal GDP equals the sum of current year prices multiplied by current year quantities for all final goods and services.Step 2: Recall that real GDP equals the sum of base year prices multiplied by current year quantities for the same set of goods and services.Step 3: The GDP price index, or GDP deflator, equals (nominal GDP / real GDP) * 100.Step 4: Since the quantities in the numerator and denominator refer to the same current year quantities, the ratio isolates how current prices compare to base year prices.Step 5: Therefore, the index measures the average price changes for the output produced within the country, not the quantity of resources or the cost of individual inputs.

Verification / Alternative check:
Macroeconomics textbooks describe the GDP deflator as a comprehensive measure of the price level for all final goods and services produced in the economy. They emphasise that it includes consumption, investment, government purchases, and net exports as long as the goods or services are produced domestically. The deflator is often compared with the consumer price index, which covers only a basket of consumer items. This comparison confirms that the GDP price index measures the average prices of domestic output, not resource quantities or only imported goods.

Why Other Options Are Wrong:
The total amount of resources available, option a, is a quantity concept and is not what a price index measures. Option b refers to the value of final output at constant prices, which is real GDP, not the GDP price index itself. The cost of resources employed, option c, focuses on input prices rather than the prices of final output. Option e suggests that the index measures only imported goods, which is incorrect because the GDP deflator covers all domestically produced final goods and services.

Common Pitfalls:
Students sometimes confuse real GDP, nominal GDP, and the GDP price index because all three are related. Another frequent mistake is to mix up the GDP deflator with the consumer price index and to think that both measure prices in exactly the same way. To avoid these errors, remember that real GDP measures quantities at base prices, nominal GDP measures value at current prices, and the GDP price index captures the overall price level of domestic output by comparing the two.

Final Answer:
The GDP price index measures changes in the average prices of the final goods and services produced within the nation.