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Chapter 9: Q. 32 (page 243)

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

Short Answer

Expert verified

Perfect indexing is not possible as there is no measure efficient enough to calculate accurate inflation.

Step by step solution

01

Step 1. Meaning of Index Number

An index number is a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier since the index number has values around100.

02

Step 2. Is perfect indexing possible?

Perfect indexing is not possible as there is no measure efficient enough to calculate accurate inflation.

Inflation is measured by GDP deflator and CPI.

GDP deflator is not perfect because it takes into consideration goods and services produced and not consumed. CPI also has several drawbacks such as substitution bias.

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