Measuring the changes in the cost of living

The Consumer price Index is subject to substitution bias and quality/new goods bias. Are the Producer Price Index and the GDP Deflator also subject to these biases? Why or why not?

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Expert Solution

The PPI is subject to the substitution and quality/new goods biases for significantly the same reasons the CPI is. The GDP defltor picks up prices of what is actually purchased annually, so there exists no biases. Hence, that is an advantage of using the GDP deflator over the CPI.

The PPI is subject to substitution bias and quality/new goods bias.

Joes answered 3 years ago

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