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LePhuocBaToan DE180495 Essaytest

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LePhuocBaToan DE180495 Essaytest

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toàn lê
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© © All Rights Reserved
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ESSAY TEST

Course Macroeconomics - ECO121

Academic year Fall Semester 2024

Lecturer Huydnm2

Assignment ESSAY TEST


Title

Submission Online ( file Word.doc ) - Edunext


mode

STUDENT INFORMATION

Name: LÊ PHƯỚC BÁ TOÀN Roll number: DE180495

Room No: 220 Class: IB19B01

I. THREE MAIN PROBLEMS WHEN USING CPI:


When using the Consumer Price Index (CPI) to measure the cost of living, there

are a number of problems that arise due to the way it is calculated and other

external factors that come into play. The three main problems are listed below:

Substitution Bias, Introduction of New Goods, Unmeasured Quality Change.

1. SUBSTITUTION BIAS:

Over time, some prices rise faster than others. Consumers tend to substitute

cheaper goods for more expensive goods. The CPI ignores this substitution

because it uses a fixed basket of goods.

For example: As the price of coffee increases due to reduced supply, consumers

will switch to cocoa because it is cheaper. The CPI still assumes that consumers

will continue to buy coffee at a higher price, leading to a recorded increase in the

cost of living in the basket of goods. However, consumers have changed their

shopping habits by replacing coffee with cocoa.

As a result: The CPI overstates the increase in the cost of living.

2. INTRODUCTION OF NEW GOODS:

When a new product is introduced, it may meet consumer demand and the CPI

cannot be updated immediately because the CPI uses a fixed basket of goods.

When a new product is added to the basket, the CPI usually takes a certain amount

of time to catch up with the change in consumption.


For example: As new smartphones emerge on the market, they quickly replace

older models. The CPI cannot immediately reflect this change because the basket

structure does not update in a timely manner.

As a result: CPI does not accurately reflect consumer spending when new

products replace old ones.

3. UNMEASURED QUALITY CHANGE:

When there is a change in the quality of a good, consumers may pay a higher
price for it and still receive a higher value from it. The CPI cannot accurately
adjust for changes in the quality of a good.

For example: A new car may cost more than an older car because it has new and
more modern features. The CPI cannot measure customer satisfaction with the new
car.

As a result: The CPI can overstate cost-of-living increases by not adjusting


enough or adjusting incorrectly for improvements in quality.

II. CONTRASTING THE CPI AND GDP DEFLATOR:

Consumer Price Index (CPI) and GDP Deflator, we can explain the

difference in inflation rates based on: Imported consumer goods, Entity

buying, and The basket of goods. Here is how each of these factors affects the

two indexes:

1. IMPORTED COSUMER GOODS:


CPI: The consumer price index includes imported consumer goods. When the

prices of imported goods increase, the CPI will reflect this increase, because

consumers have to pay more for imported products.

GDP Deflator: The GDP deflator only takes into account the prices of

domestically produced goods and services, not imported goods. Therefore,

when the prices of imported goods fluctuate, the GDP deflator is not directly

affected.

2. ENTITY BUYING:

CPI: The Consumer Price Index measures only the prices consumers pay for

goods and services. It only reflects the cost of goods and services for personal

consumption by households.

GDP deflator: The GDP deflator includes not only the goods and services

purchased by consumers, but also all economic spending, such as government

spending, business investment, and spending on exports.

3. THE BASKET OF GOODS:

CPI: The basket of goods in the CPI is fixed, which means that if there is a

change in consumption due to the introduction of new products or substitution

between products, the CPI may not accurately reflect current consumption

trends.
GDP deflator: The basket of goods in the GDP deflator is not fixed but

changes according to the production and consumption structure of the economy.

This helps the GDP deflator reflect changes in the production and consumption

levels of the entire economy more accurately than the CPI.

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