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7 Cards in this Set
- Front
- Back
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the percentage increase in the price level from one year to the next and shows the change in the cost of living. |
Inflation rate |
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an average of the prices of the goods and services purchased by a typical urban family of four. |
Consumer price index (CPI): |
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There are four biases that make the CPI overstate (make it bigger than it actually is) the true inflation rate: |
Substitution bias Increase in quality bias New Quality Bias Outlet Bias |
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As some goods get more expensive, consumers substitute them with cheaper goods; the CPI is measured on a fixed market basket and, therefore, does not reflect this substitution. |
Substitution Bias |
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some increases in prices reflect an increase in quality of goods and are not just pure inflation. |
Increase in Quality Bias |
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some new goods (especially, electronics) get considerably cheaper immediately after they’ve been introduced to consumers; the CPI fails to reflect this. |
New product Bias |
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internet shopping becomes increasingly popular; the CPI does not reflect this because the BLS collects receipts from actual stores and not internet retailers. |
Outlet Bias |
