Question

1. Identify four biases that the CPI suffers from and explain them

2. How does inflation affect society and who are the losers and gainers from inflation?

3. List and briefly describe the 17 Sustainable Development Goals (SDGs).

4. What other indicators (list at least 3) can be used to supplement GDP as a measure of welfare?  

Answer 1

1) Consumer Price Index (CPI) is a commonly used measure of consumer price level. It suffers from the following biases-

*Substitution bias- when price of a good increases people substitute it for low priced alternative goods. But CPI does not take into account this substitution effect as it is a fixed weight index (quantity of goods is fixed) and overstate inflation.

*Quality bias- CPI does not reflect the improvements in the quality of goods from period to period. Technological advances improves the life and quality of the product but a higher price needs to paid for such products, this is not inflation but will be recorded as inflation under CPI.

*New product bias- CPI does not incorporate new products unless it becomes very common, so the decrease in prices due to new technology products is not reflected in the CPI.

*Outlet bias- consumers shift to new outlets with changes in retailing structure. For example people will start purchasing from wholesale markets at wholesale rates or shop online when prices at retail centres becomes expensive. This is not captured by CPI if it uses prices from the retail centres and overstate inflation.