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Chapter 22: Q 32. (page 553)

Do you think perfect indexing is possible? Why or why not?

Short Answer

Expert verified

No, it's not possible to have perfect indexing.

Step by step solution

01

Step 1. Definition

Indexing is defined as the use of some standard indicator as a yardstick. In economics and finance, field indexing is the statistical estimate for tracing economic data like inflation, GDP, unemployment, market returns, and productivity.

02

Step 2. Explanation

Indexing is perfectly done when we measure inflation accurately. And inflation is measured by two methods that are GDP deflator and CPI.

When we measure inflation by GDP deflator it includes the goods and services produced rather than goods and services consumed so this is not the accurate measure of inflation.

On the other hand, when we measure inflation by CPI it includes only goods and services consumed so this is not also an accurate measure of inflation.

03

Step 3.

And in both conditions, if the inflation is not measured accurately then how do we perfectly do indexing. So, it is not possible to do indexing perfectly because every method has lagged and we don’t use both methods at the same time.

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Most popular questions from this chapter

Why does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of

goods?

If inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:

a. A union member with a COLA wage contract

b. Someone with a large stash of cash in a safe deposit box

c. A bank lending money at a fixed rate of interest

d. A person who is not due to receive a pay raise for another 11 months

Why is the GDP deflator not an accurate measure of inflation as it impacts a household?

Describe a situation, either a government policy situation, an economic problem, or a private sector situation, where using the GDP deflator to convert from nominal to real would be more appropriate than using the CPI.

Why do you think the U.S. experience with inflation over the last 50 years has been so much milder than in many other countries?
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