Question

1. Using the official unemployment numbers to understand the state of the economy is said to have two major shortcomings. Identify these flaws.
2. Why is it argued that the Consumer Price Index overstates inflation?

Answer 1

1) Shortcomings of official unemployment numbers:

-- It Doesn’t Account for Discouraged Workers: The discouraged workers who have given up looking for a job are excluded from the statistics. A discouraged worker is an individual who wants to work but is no longer seeking employment because of the conviction that no opportunities exist. Thus, it may cause the official unemployment rate to understate the real amount of unemployment.

-- Doesn’t Separate Full-Time and Part-Time Workers: The official unemployment rate may understate the true rate of unemployment because of part-time workers who cannot search a full-time job are, nonetheless, counted as fully employed

2) CPI data as given by government agencies does not provide a true picture about inflation; and it overestimates the U.S. inflation rate. The CPI does not take into consideration the quality improvement when looking at the increasing prices of most goods, thus is quality biased. Furthermore does not recognize reduction in prices due to expansion of discount outlet chains, thus is outlet biased. Moreover does not include household purchases of imports from other nations and purchase of used goods. Also the new technologies are usually introduced into the BLS market basket only after a lag. Thus there is upward bias in the CPI