Principles of Economics 3. part 6 Essay Example | Topics and Well Written Essays - 750 words

Principles of Economics 3. part 6 - Essay ExamplePrices of goods and services do non change proportionately over time. This means that some prices rise more than others and consumers substitute products and services that feed become relatively less expensive. CPI overstates the cost of living by excluding the possibility for product substitution.When the gauge of a good deteriorates, the value of the dollar falls, and vice versa. Because changes in the quality are hard to measure, the hoop calculates prices on the assumption that quality is constant, which distorts the CPI measures.Although the CPI is not perfect, together with other indexes like gross domestic product deflator or PPI, it gives a relatively useful indication about the cost of living for consumers. CPI and other price indexes are used to compare dollar values over time, by taking into account statement the effects on inflation.ReferenceMankiw, G. (2004) Chapter 24. Measuring the Cost of Living Principles of Econ omics pp.