In your opinion, is the CPI a good measure of inflation?



Answer:
It's an approximate measure. But is not exact, in fact it consistently overestimates the rate of inflation. This is due to the 'fixed' basket of goods that the CPI is based on. It does not change fast enough for new consumer products and it does not allow for substitution.

For instance, if steak is in the 'fixed' basket, but hotdogs are not, people may decide to switch to hot dogs which are cheaper, not enjoy them as much but because of what they can do with the extra cash, overall do just as well. When a price of a good rises, there is an income effect and a substitution effect when coming to choices based on a budget and a given set of preferences... the CPI only accounts for the income effect.

Hope that's not too confused to understand.

Peace
No. I think they use a lot of funny math to come up with the Consumer Price Index. For example, housing and energy costs are real costs, but when the housing market sores they don't take into consideration the average stay in a house and thus the increased costs of trading.

A good measure of inflation is the value of the currency as compared to GOLD. It's a world standard. Not some country specific formula.
The CPI systems has its flaws.

1. The base year at which prices are taken could be when the economy is experiencing inflation. Thus, the prices could be unnecessarily high.

2. The 'basket' of goods does not represent the true consumption of all levels of society. For example, A middle class family could include "cable TV subscription" in the basket, but a lower class family wouldn't include it.

3. The basket of goods taken in the base year may not be the same a few years later. For example, instant noodles may not be included the basket 5 years ago, but now they're almost an essential in every household.

4. The weights assigned to each good may not represent the true importance placed on each good. Economists may assume that 'clothes' deserve a weight of 5, but the average household may only place a weight of 3 on 'clothes'.

Well, that's all I can think of. Look into any textbook, I'm sure they have everything about CPI.

I LOVE ECONS.

God Bless.

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