ECON1130 Lecture 9: Feb16_ECON1132_Konan

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Not a perfect measure of cost of living. Cpi tends to overstate cost of living. People tend to substitute towards goods that have become relatively cheaper. Cpi basket is fixed so doesn"t allow for this: new product bias. Fixed basket does not allow for introduction of new goods. With price increases, it is difficult to separate the part due to inflation: increase in quality bias. Cpi does not allow for changes in quality. Again, hard to differentiate between inflation and effect of increase in quality effect: outlet bias. When we measure cpi, we use full retail prices. However, sale and outlet prices exist and are often taken advantage of. Definition: price index based on a basket of goods used by producers, average prices of goods used by producers in all stages of production. Use of ppi: used to predict movements of future consumer prices.

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