Question

Briefly describe the problems that always arise from measuring price levels with a fixed basket of goods and what steps can be taken to counter these problems.

Answer 1

Measuring price levels with a fixed basket of goods will always have two problems, Here fixed basket of goods means does not allow for buying more of what is relatively less expensive and less of what relatively more expensive

The consumer price index or CPI is a more is directly related with than GDP of standard of living in a country. Actually it is based on the overall cost of the fixed basket goods and services bought by a typical consumer. relative to price of the same basket in some base year .   By the range of thousands of fixed basket, the CPI can obtain an accurate estimate of the cost of living .CPI is not monetary value but it is an index number or percentage from base year.

Following are the problems in the BASKET OF GOODS over time –

SUBSITITUTION BIAS – This is the first problem in basket of goods, As the price of goods and services changes from one year to next year, But the availability does not change   by the same amount.

INTRODUCTION OF NEW ITEM- The second problem of basket and goods is introduction of new item , as the time pass when item added to the basket , still the purchasing power is same.

QUALITY CHANGE-

The third problem of basket of goods is that changes in quality of goods and services are not handled. When item added to the basket, increase and decrease in the quality of basket ,the value and desirability of the item changes.

Flowing steps are taken to counter thse problems-

INFO SUPPLY CHAIN- The government should invest in a market information system for accurate and timely data of crop production, trade and prices .This will provide information of consumer supply chain.

REAL COMPETION- Encouraging competition through efficient markets, Removing barriers such as mandi licenses as well as state taxation law will puncture marketing margin.

TAKE TECH SERIOUSLY- Target should accelerate technology dissemination especially related with environmental sustainability, climate change, mechanization and crop yield. It reduces the dependency on costly inputs, labor and chemical and stimulates food supply.

DON’T KEEP POKING- The government should stop market interventions in its zeal to balance consumer and farmer interest.

CALM VOLATILITY- Target to encourage strengthening of the supply pipeline by the private sector to reduce price volatility .There is inverse relationship between stock in the pipeline and prices.