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Chapter 9: Q 15. (page 243)

Why does the 鈥渜uality/new goods bias鈥� arise if we

calculate the inflation rate based on a fixed basket of goods?

Short Answer

Expert verified

This happens because of various reasons which we discuss.

Step by step solution

01

Step 1. Definition

The quality/new goods bias is defined as the rise in the price of a fixed basket of goods over a period of time that tends to exaggerate the rise in a consumer's real cost of living.

02

Step 2.

The 鈥渜uality/new goods bias鈥� arises if we calculate the inflation rate based on a fixed basket of goods. This happens because of improvement in existing goods and new arrival of goods, the invention of new goods.

And if something is improved but the price becomes the same then the object is cheaper.

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Most popular questions from this chapter

22. Inflation rates, like most statistics, are imperfect

measures. Can you identify some ways that the inflation rate for fruit does not perfectly capture the rising price of fruit?

How to Measure Changes in the Cost of Living introduced a number of different price indices. Which price index would be best to use to adjust your paycheck for inflation?

Why does 鈥渟ubstitution bias鈥� arise if we calculate

the inflation rate based on a fixed basket of goods?

The index number representing the price level changes from 110 to 115 in one year, and then from 115 to 120 the next year. Since the index number increases by five each year, is five the inflation rate each year? Is the inflation rate the same each year? Explain your answer.

The Consumer Price Index is subject to the substitution bias and the quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?
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