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Micro-economic - Essay Example

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Micro – economic essay Instructor: Micro – economic essay Inflation is merely an increase in the average level of prices in an economy over a period of time i.e. it is the change in the costs of living. When the general price level goes up, each unit of currency purchases fewer goods and services…
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Micro-economic essay
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Download file to see previous pages... The living cost change between two periods indicates how much income people would have needed in the previous period given the price of goods and services available then. For example if a family with $15,000 income in 2000 would have needed $45,000 in 1999, then the cost of living has dropped by two thirds. The commission argues that the complexity of the dynamicity of the economy should not be reasons to bemoan the difficulties in the construction of an accurate cost of living index. It highlighted sources of possible bias and further suggests improvements to the various official statistics currently used as proxies for changes in the cost of living like the consumer price index that measures the cost of purchasing a fixed market basket of goods and services. The CPI is calculated, while keeping the weights fixed through time, by attempting to measure changes from one month to another in prices of the same or quite closely related goods and services. But this weights would no longer reflect what consumers are actually purchasing because through consumption baskets change in part because of changes in the relative prices of goods and services. Where the purchases are made also do change just like consumers do change their purchases. The current methodology suffers from outlet substitution bias that insufficiently takes into account the shift to discount outlets. This occurs when shifts to lower price outlets are not properly handled. The quality change bias also comes into play when improvements in quality, such as efficiency are measured inaccurately or not at all. Many of the current products are efficient that those from recent years as they are dramatic improvements hence more durable and subject to less need for repair. A better quality product in replacing its counterpart will cost more hence the change in price is due to quality change and not inflation. The same is true with the introduction of a new product. People tend to add the new product and not replace the old with new. There is new product bias in the CPI as to some extent new products is excluded from the basket or are included after a long lag. Substitution bias also occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change (Shostak, PhD, Frank March 2, 2002). ...Download file to see next pagesRead More
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