Question

Which of the following was a way for the Bureau of Labor Statistics to reduce the quality/new good bias in its calculation of the CPI?

Group of answer choices

Update the list of products included in the CPI more often and rapidly.

Allow for some substitution amongst products.

Remove energy and food prices.

Automatically reduce the inflation by 0.5% to account for quality/new good bias.

Answer 1

The Bureau of Labor Statistics reduced the quality/new goods bias in the CPI calculation by updating the basket of goods more frequently, allowing for substitution among products, and conducting studies to measure the quality improvement of specific products.

Step-by-step explanation:

The Bureau of Labor Statistics (BLS) implemented several measures to reduce the quality/new goods bias in its calculation of the Consumer Price Index (CPI). One of the ways was by updating the basket of goods more frequently to include new and improved goods more rapidly. This allows the CPI to reflect the improvements in the quality of existing goods and the introduction of new goods, which improves the standard of living. Another method was to allow for some substitution amongst products, recognizing that consumers may switch to lower-priced alternatives when prices rise. This adjustment accounts for the fact that the cost of living is improving when people can find better value for money through substitution. The BLS also carried out studies for certain products to measure the quality improvement, such as adjusting for changes in speed, memory, and other characteristics of products like computers. By incorporating these adjustments, the BLS aims to minimize the quality/new goods bias in the CPI calculation.

Answer 2

To address the quality/new good bias in CPI calculations, the Bureau of Labor Statistics updates its product list frequently to include new and improved items more quickly and conducts quality improvement studies to adjust price changes for products such as computers.

Step-by-step explanation:

To reduce the quality/new good bias in its calculation of the Consumer Price Index (CPI), the Bureau of Labor Statistics implemented several strategies. One effective approach was to update the list of products included in the CPI more frequently. This allowed the inclusion of new and improved goods more rapidly into the CPI calculation. Another method adopted involved conducting studies to measure the quality improvement of certain products, such as computers, where adjustments for changes in technical specifications like speed, memory, and screen size would be considered when calculating price changes.

Furthermore, the BLS employed alternative mathematical methods to allow for some substitution amongst goods, reflecting consumer behavior when they switch between similar items due to price changes. However, the adjustments for quality improvements are not perfect and remain a subject of debate among economists.