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Chapter 22: Q 32. (page 553)

Do you think perfect indexing is possible? Why or why not?

Short Answer

Expert verified

No, it's not possible to have perfect indexing.

Step by step solution

01

Step 1. Definition

Indexing is defined as the use of some standard indicator as a yardstick. In economics and finance, field indexing is the statistical estimate for tracing economic data like inflation, GDP, unemployment, market returns, and productivity.

02

Step 2. Explanation

Indexing is perfectly done when we measure inflation accurately. And inflation is measured by two methods that are GDP deflator and CPI.

When we measure inflation by GDP deflator it includes the goods and services produced rather than goods and services consumed so this is not the accurate measure of inflation.

On the other hand, when we measure inflation by CPI it includes only goods and services consumed so this is not also an accurate measure of inflation.

03

Step 3.

And in both conditions, if the inflation is not measured accurately then how do we perfectly do indexing. So, it is not possible to do indexing perfectly because every method has lagged and we don鈥檛 use both methods at the same time.

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Most popular questions from this chapter

Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time payment of \(20,000. However, if the inflation rate is 6% per year, how much buying power will that \)20,000 have when measured in today鈥檚 dollars? Hint: Start by calculating the rise in the price level over the 16 years.

Identify several parties likely to be helped and hurt by inflation.

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