Question

Class, is CPI a good measure of price level? What are the consequences of the CPI bias? How would you compare CPI to other measures of price level?

Answer 1

CPI has its own advantages but rather the disadvantages outwight the advantages which makes it one of the bad estimators for CPI and in this regard they include the fact that CPI actually doesn't consider the substitute effect of goods or the buying habits or the relative levels of demand and supply only with respect to that of the particular good as a result.of which the actual reason for the price increase or decrease is not known which can result in overstating or understating the inflation. It doesn't take the new products into account where old basket would be repeatedly used and cost only in urban areas are considered. Apart from CPI, Wholesale price index or WPI can be considered as a method to estimate the index which is better because it reduce the intermediaries effect and Producer Price Index or PPI is also used wgich is better because substitutes or buying choices is not accounted here.