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Consumer Price Index - Essay Example

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Summary

In the essay “Consumer Price Index” the author lists three strengths and three weaknesses of the Consumer Price Index calculation. The basket of goods is fixed and fails to reflect the substitution of products and services. CPI isolates the effect of quantity changes…

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Subject: Finance & Accounting
Type: Essay
Level: College
Pages: 1 (250 words)
Downloads: 2
Author: dbogisich

Extract of sample "Consumer Price Index"

Prices of goods and services do not change proportionately over time. This means that some prices rise more than others and consumers substitute products and services that have become relatively less expensive. CPI overstates the cost of living by excluding the possibility of product substitution. When the quality of a good deteriorates, the value of the dollar falls, and vice versa. Because changes in the quality are hard to measure, the basket calculates prices on the assumption that quality is constant, which distorts the CPI measures.

Although the CPI is not perfect, together with other indexes like GDP deflator or PPI, it gives a relatively useful indication about the cost of living for consumers. CPI and other price indexes are used to compare dollar values over time, by taking into account the effects on inflation.

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Consumer Price Index Essay Example | Topics and Well Written Essays - 250 words. https://studentshare.org/finance-accounting/1532272-principles-of-economics-3-part-6

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Consumer Price Index Essay Example | Topics and Well Written Essays - 250 Words. https://studentshare.org/finance-accounting/1532272-principles-of-economics-3-part-6.

“Consumer Price Index Essay Example | Topics and Well Written Essays - 250 Words”. https://studentshare.org/finance-accounting/1532272-principles-of-economics-3-part-6.

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