newgoods - Page 1 of 2 About sponsorship And...

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And now prices can be “virtual” too Jun 12th 1997 From The Economist print edition The value of new products may seem obvious to those who buy them. But economists find it tricky to estimate ARE you better off today than you were ten years ago? Working out the answer may seem easy: compare your income now with what you had then, and see whether it has risen faster than the consumer-price index. But, on reflection, the calculation is not quite so simple. That new car, with all its computer-controlled systems, is barely comparable with the one you owned a decade ago. Your cotton shirts are wrinkle-proof. Your clothes dryer is clever enough to shut off automatically when it senses that your socks are dry, and your television may allow you to watch two different channels at once. All of this innovation surely makes life better—but just how much? Normal people might not give this question much thought. If new gadgets are affordable and make life easier or more fun, they are worth buying: end of story. Economists want a more precise answer. Finding one is a difficult task, both theoretically and statistically. The traditional method is to estimate how much more people would have had to pay, at the prices of a decade ago, to be as well off then as they are now. Compare this with what they spent back then, and the answer emerges. This, roughly, is how most consumer-price indices are formulated. By definition, however, goods that have come to market only recently did not have prices ten years ago. The usual method of calculating their effect on consumers’ well-being doesn’t work. This matters to politicians as well as economists. Official price indices determine welfare payments, guide governments’
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This note was uploaded on 04/11/2009 for the course ECON 102 taught by Professor Serra during the Winter '08 term at UCLA.

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newgoods - Page 1 of 2 About sponsorship And...

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