Answer to Question #94305 in Macroeconomics for ANABEL GARCIA

Question

The consumer price index (CPI) can be used to measure inflation. There are potential problems with this process though that can result in inflation being overstated or understated. Place each statement according to whether it would cause inflation to be overstated, understated, or would give an accurate representation of inflation.

Answer 1

in order to calculate the consumer price index, you need to take the cost of the consumer basket at the end of the period, divide by its original value and multiply the result by 100%.

The most controversial issue in calculating the consumer price index is the composition of the consumer basket taken as the basis.

The basket includes, in a certain proportion, the average consumed food, clothing, electricity, maintenance of premises and vehicles, medical care, recreation and education. To adequately reflect changes in the level of consumer spending, the basket should focus on the real structure of consumption. Then over time, it can change.

Any change in the composition of the basket, both the introduction of new goods and the change in the proportions, makes the previous data incompatible with the current. The consumer price index is distorted. If we compare the indicators obtained on the basis of a new basket with the indicators based on an unchanged basket, they can differ, sometimes by a very large amount.

On the other hand, if you do not change the basket, then after a while it will cease to correspond to the real structure of consumption. It will give comparable results, but these results will not correspond to changes in real consumption costs, will not reflect their real dynamics.