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Chapter 9: Q. 32 (page 243)

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

Short Answer

Expert verified

Perfect indexing is not possible as there is no measure efficient enough to calculate accurate inflation.

Step by step solution

01

Step 1. Meaning of Index Number

An index number is a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier since the index number has values around100.

02

Step 2. Is perfect indexing possible?

Perfect indexing is not possible as there is no measure efficient enough to calculate accurate inflation.

Inflation is measured by GDP deflator and CPI.

GDP deflator is not perfect because it takes into consideration goods and services produced and not consumed. CPI also has several drawbacks such as substitution bias.

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Most popular questions from this chapter

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

Why does “substitution bias” arise if we calculate

the inflation rate based on a fixed basket of goods?

Compute the inflation rate for fruit prices from 2001 to 2004.

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

Rosalie the Retiree knows that when she retires in 16years, her company will give her a one-time payment of \(20,000. However, if the inflation rate is 6%per year, how much buying power will that \)20,000have when measured in today’s dollars?
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