Measuring Economic Health: Consumer Price Index

Table of Contents

What are the characteristics of the items listed as strengths?
What are the characteristics of the items listed as weaknesses?
If the CPI is imperfect, why do we use it?
Reference List

The course under consideration is rather important as it helped to understand a lot of different market and economical changes in the country. The knowledge possessed may help in real life while providing big purchases and just calculating the domestic budget per period (week, month, or year). The main advantage of the GDP is that it allows providing a quick comparison of standards of life in countries. The main disadvantage is that GDP is not really the standard of life measuring, but the measuring of the economic activities.

GDP and the economical well-being of the country are two notions that are connected. Moreover, GPD may measure the level of economical well-being by means of GDP statistics, which shows the relative neglect of dimensions of well-being. Considering the question of the relationship between the level of GDP and economic well-being, it is impossible to miss the factors which make GDP an inadequate measure of economic well-being, even though these notions are closely interconnected and influence each other. The problem is that GDP cannot directly measure economic well-being because of several facts. (1) GDP ignores household production and leisure time, (2) positional competition is ignored by GDP, (3) the pollution of the environment and long commuting is also avoided, (4) the exhaustible resources are not debited, (5) the life and work quality is missed in GDP, and (6) meta-externalities are ignored. So, these are the factors that are not taken into account while GDP evaluation, but which influence the economical well-being (Cohn, 2006).

Cohn (2006) also states that the excellent proxy for national economic well-being and maximizing GDP is an excellent strategy for maximizing national well-being (p. 76). So, the versa effect is also possible, that is the increase of the economical well-being increases the GDP. So, the factors which increase the well-being may influence the GDP as wealth and happy people influence the countrys economics for the better. The example of pollution is rather informative, as polluted air or water never increases the GDP, even though there is no direct interconnection, these notions still have some far and indirect influence on each other.

Before providing the information about the strengths and weaknesses of the CPI, it is significant to mention the steps of CPI calculation: fix the basket, find the prices, compute the baskets cost, choose a base year and compute the index and compute the inflation rate (Mankiw, 2004).

Strength

Weakness

The consumer price index allows measuring the overall cost of living and monitors the changes which occur with the cost of peoples living (Mankiw, 2004).
The customer price index allows following the rise or lowering of inflation (Afriat, 2004).
The consumer price index is the reflection of useful statistical information which is rather cheap in implementation (Bureau of Labor Statistics, 2009).

Substantial bias (disproportional change of prices on different goods and customers attitude to the different goods changes, the good basket changes and the price indexes have to be changed).
Introduction of new goods (market changes, new goods appear, and the consumers are given a great variety of goods, while the consumer price index is calculated coming out of the fixed good basket).
Unmeasured quality change (the change of the quality of the goods, even with the same price on the goods, changes the value of the price) (Mankiw, 2004).

What are the characteristics of the items listed as strengths?

The characteristics, which are listed as the strength, are the statistical issues. It is proved that statistics is rather important in any sphere of economical and social life. The main feature of the importance of statistics is that it helps to analyze the previous periods (the consumer price index in our case) and to make the possible forecast for the next period (Bureau of Labor Statistics uses one month as the reporting period).

What are the characteristics of the items listed as weaknesses?

The characteristics which are offered in the weakness list are mostly the economical and market changes. In another word, the consumer price index is a stable number of goods that are impossible to change when the situation on the market (either with the price or with the quality of the product). When the price index is ready it stays reliable for a month (report period), and the changes which occur during this month are out of its consideration.

If the CPI is imperfect, why do we use it?

The Consumer Price index is imperfect, but it is still used in the economical world. The reason for the usage of such an imperfect system is that there is no other index that could calculate and measure the overall costs of peoples life and the rate of inflation. Moreover, the consumer price index is sometimes used as the follower of the government actions, which were provided with the aim to reduce it. The consumer price index helps to predict the changes in the economical situation on the market and to evaluate the change of customers goods basket (Healy, 2009).