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Inflation 2 - PRINCIPLES OF MACROECONOMICS INFLATION 2...

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PRINCIPLES OF MACROECONOMICS INFLATION 2 Foster
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2 Problems with the CPI: Substitution Bias Over time, some prices rise faster than others. Consumers substitute toward goods that become relatively cheaper. The CPI misses this substitution because it uses a fixed basket of goods. Thus, the CPI overstates inflation (increases in the cost of living).
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3 Problems with the CPI: Introduction of New Goods/New Outlets The introduction of new goods and new outlets increases variety, allows consumers to find products that more closely meet their needs. The CPI misses this effect because it uses a fixed basket of goods. Thus, the CPI overstates increases in the cost of living.
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4 Problems with the CPI: Unmeasured Quality Change Improvements in the quality of goods in the basket increase the value of each dollar. The BLS tries to account for quality changes but probably misses some, as quality is hard to measure.
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