Economics 1022A/B Chapter Notes - Chapter 22: Typewriter
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ECON 1022A/B Full Course Notes
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The biased cpi: new goods bias. If you want to compare the price level in 2014 with that in. 1970, you must somehow compare the price of a computer today with that of a typewriter in 1970. Because a pc is more expensive than a typewriter was, the arrival of the pc puts an upward bias into the cpi and its inflation rate. Car and many other goods get better every year. Part of the rise in the prices of these goods is a payment for improved quality and is not inflation. But the cpi counts the entire price rise as inflation and so overstates inflation: quality change bias, commodity substitution bias, outlet substitution bias. Changes in relative prices lead consumers to change the items they buy. For example, if the price of beef rises and the price of chicken remains unchanged, people buy more chicken and less beef.