Hedonic Method in the Consumer Price Index - Case Study Example

Hedonic Method in the Consumer Price IndexCase StudyQuestion 1: What is the hedonic method and why is it sometimes used to track changes in the consumer price index? The Hedonic Pricing Method is as a model that identifies factors in relation to the principle that prices are set depending on both the internal and external factors. These are the internal characteristics of the good being sold and the external factors affecting it. One of the most common examples is in the real estate market.

In this market, a property’s price is determined by its qualities (McEachern, 2012). These qualities will include the house’s appearance, features, size, and condition. The price will also be determined by its surrounding or neighborhood. The thus, Hedonic Pricing model will mostly be used in estimating the extent each of the factors affect the price. The hedonic method is used in tracking changes in the CPI so that quality adjustments to the CPI can be made. The purpose of the Consumer Price Index is measuring effects on consumer household by price changes.

The preferred method that is used to make quality adjustments is the Hedonic method. This is because it relies on statistical techniques when it estimates implicit prices of characteristics of a product derived from quantities and prices in the market place. This implicit price is used to measure of the value of qualitative differences observed in products by consumers (Bade, & Michael, 2002). This helps disaggregate observed price difference of two products into pure price change and changes in quality.

Hedonic methods have gone on to be proposed to be used in other categories of goods and services in the Consumer Price Index. The statistical techniques involved in the hedonic methods make it suitable for use in tracking even the minimal changes in the CPI. Changes like those in quality are at times overlooked but by use if this method they are tracked and adjusted adequately.ReferencesBade, R. & Michael, P. (2002). Foundations of Microeconomics Boston, MA: Addison-WesleyMcEachern, W.A. (2012).

ECON Macro 3 (3rd ed.). Mason, OH: South-Western