Biases in CPI

•Substitution Bias – CPI assumes we purchase same number of goods and services regardless of the price.
•New Products – CPI updates product pricing every two years, therefore prices are over-estimated, pushing CPI artificially higher.
•Increase in Quality Bias – CPI does not accurately reflect product quality increases. CPI only recognizes price increases, and doesn’t justify why the increase occurred.
   – CPI only captures prices from retail establishments, and does not consider discount shopping, i.e. shopping Amazon vs Barnes and Noble


Chained CPI vs Regular CPI



Nominal Wages vs Real Wages


•The nominal wage is the wage measured in money (dollars in the United States). The real wage is the nominal wage in an economy adjusted for changes in purchasing power. It is defined as the nominal wage divided by CPI
•
•Dollars today = Dollars in the past x  CPI Today
         CPI in Past


       $4.8 million in 1995  = $1million 1960 x 160.5 1995
                 33.4 1960




Last modified: Tuesday, August 14, 2018, 10:13 AM