2. CPI Measurement Bias (Ch2)

Principles of Macroeconomics (with Xtra!)

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T he consumer price index (CPI) has proven to be a reliable and widely accepted yardstick of price changes in the Canadian economy over the years. Nevertheless, all price indexes have their shortcomings, and the CPI is no exception. The potential “measurement bias” of the CPI is an important issue for research. Tendency to overstate inflation The CPI, like price indexes in other countries, may overstate increases in the cost of living because it cannot take into account a number of hard-to-measure factors. One measurement bias in the CPI may occur because the quantities of the various items in the basket are fixed. Consumers can adjust to price changes by buying less of an item whose price has risen and more of a cheaper substitute. Statistics Canada attempts to take into account some of this adjustment by updating the contents of the CPI shopping basket every four years. Bias may be introduced when prices rise because of a quality improvement in a product or service, rather than because of a pure price increase.
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