What problems does the following pose for people who are responsible for computing a price index?DVD players and HDTVs have not been part of the US economy for very long. Both goods have been...

What problems does the following pose for people who are responsible for computing a price index?

DVD players and HDTVs have not been part of the US economy for very long. Both goods have been decreasing in price and improving in quality.

Asked on by xnoe323x

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This causes two problems for people who are trying to compute the consumer price index (CPI).

First, there is the problem of new goods that become something of “necessities” for the average household.  If HDTVs and DVD players (though DVD players are becoming outdated themselves) come to be “needed” by the typical household, they may need to be included in the market basket used to compute CPI.  It is hard to know what items to include as tastes change.

Second and more importantly, it is very hard to compare the prices of newer products with those of older products.  An HDTV and an old, cathode ray analog TV are both TVs.  But they are very different in terms of quality.  How does one account for the change in quality when computing the CPI?  Are they the same good?  Does an adjustment need to be made in the prices to account for the change in quality?

These issues mean that the changes in technology that you mention can cause problems for those computing a CPI.

 

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