Question

If it is true that the CPI overstates how serious the cost of living has been increasing in America, then what are the implications for what really has happened to the average wage of a manufacturing worker in the US since 1980? (It would be useful to look up the nominal wage – that is, the wage unadjusted for inflation – in 1980 and as recently as you can find it, which should be March 2018. And then you might think how you can convert nominal wages into “real” wages using the CPI).

Answer 1

The CPI (CONSUMER PRICE INDEX)

• IT IS A STATISTICAL ESTIMATE THAT MEASURES THE CHANGES IN THE PRICE LEVEL OF GOODS AND SERVICES
• REPRESENTATIVE SAMPLE ITEMS PRICES ARE USED PERIODICALLY TO ESTIMATE THE PRICE LEVELS
• A MEASURE USED BY MOST OF THE NATIONS TO ESTIMATE THE EXPENDITURES
• IT ESTIMATES THE AVERAGE CHANGE IN PRICE OVER A PERIOD OF TIME FOR THE CONSUMERS GOODS AND SERVICES
• THERE ARE DIFFERENT WAYS TO ESCALATE THE CPI, SOME OF THEM BEING TO BRING OUT AND ADJUST THE HISTORICAL DATA, TO ESCALATE FEDERAL PAYMENTS AND TAX BRACKETS, AND TO ADJUST RENTS AND WAGES.
• SINCE IT DIRECTLY AFFECTS THE LIVES OF AMERICANS IT SHOULD BE ACCURATE AND PRECISE AS MUCH AS POSSIBLE
• THE ACCURACY IS NOT PRECISE DUE TO THE WAYS IN WHICH THE RESEARCH IN BRINGING OUT THE STATISTICAL DATA FOR THE ESTIMATE OF THE CONSUMER PRICE INDEX
• SOME OF THE CAUSES BEING THE SAMPLING ERROR: LIKEMENTIONED ABOVE THE CPI IS MEASURED BY COLLECTING INFORMATION FROM THE REPRESENTATIVE SAMPLE WHICH MAY NOT PREPRESENT THE ENTIRE NATION DUE TO THE VAST CATEGORY AND A VERY VAST NUMBER OF POPULATION, THEREFORE THE PUBLISHED INDEXES DIFFER FROM THE ACTUAL RECORDS OF RETIAL PURCHASES BY ALL IN THE INDEX POPULATION
• ALTHOUGH THE CPI COLLECTS ABOUT A MILLION PRICES PER YEAR, IT IS ONLY A TINY FRACTION OF ALL THE PRICES IN AN ECONOMY.
• JUST LIKE THE OTHER SURVEYS THE CPI TOO IS BASED UPON THE SAMPLING OF COLLECTION FOR DATA WHICH IS BOUND TO A SAMPLING ERROR
• THEREFORE THE SAMPLING ERROR IS A MEASURE OF UNCERTAINITY WHICH COULD BE MESURED IN STATISTICS KNOWN AS A STANDARD ERROR
• ANOTHER FACTOR BEING BIAS WHICH IS A GREATER CONCERN TO THE ACCURACY OF THE CPI. BIAS CAN BE DEFINED AS THE DIFFERENCE BETWEEN THE EXPECTED VALUE OF AN ESTIMATOR AND THE TRUE VALUE BEING ESTIMATED, WHICH COULD BE TERMED AS EVEN MORE SERIOUS ISSUE IN COMPARISON TO THE SAMPLING ERROR
• IN THE LONG RUN THE SAMPLING ERROR COULD BE EVEN BUT THE BIAS COULD WIDEN THE GAP BETWEEN THE TRUE VALUE AND THE ESTIMATED VALUE DUE TO OVER ESTIMATION OR UNDERESTIMATION OF THE INFALTION WHICH COULD BE VERY HARMFUL TO THE ECONOMY
• SUBSTITUTING BIAS IS ANOTHER FACTOR AFFECTING THE CPI WHICH ARISES WHEN THE CONSUMERS CHANGE THEIR PURCHASING BEHAVIOUR WITH RESPONSE TO CHANGE IN RELATIVE PRICE.THE RISE IN PRICE WOULD DECREASE THE DEMAND FOR THE GOODS OR SERVICE INSTEAD CHOOSE A SUBSTITUTE THAT IS CHEAPER IN COMPARISON.
• DUE TO INSUFFICIENT ADJUSTMENT OF QUALITY THER COULD ARISE AN UPWARD BIAS IN THE CPI. THERFORE THE CPI CANNOT CAPTURE AND RECORD ALL THE PROCEDURES DESIGNED TO REFLECT THE CHANGES WHICH MAY RESULT IN A LOOP IN THE ACCURACY OF THE CPI OF AN ECONOMY THAT IS AS VAST AS THE USA
• HENCE THE MEASUREMENT OF PRICE CHANGE IN A LARGE ECONOMY IS COMPLEX AND THE ACCURACY OF THE ESTIMATE IS DIFFICULT TO GAUGE. THEREFORE THE CPI CANNOT CLAIM TO BE COMPLETELY PRECISE MEASURE.
• AS STATED ONE THIRD OF THE POPULATION LIVED IN POVERTY IN THE 1980'S. ON AVERAGE THE THE WAGES OF THE WORKERS IN THE MANUFACTURING UNNIT IN THE US SINCE 1980 WAS 9.18 USD/HOUR, REACHING AN ALL TIME HIGH IN MARCH 2018 TO 21.35 USD/HOUR