Question

6. (1 point) Describe why biases in the calculation of price indexes present serious issues for the U.S. government.

Answer 1

Precisely measuring prices and their exchange rate is central to nearly every economic issue, from monetary policy conduct to measuring economic progress over time and across countries to cost and structure of indexed spending and taxes. While many aspects of the CPI imply a likely upward bias, it is important to realize that downward biases can and do occur; it appears, for example, that the CPI shelter component may have been historically overestimated. Likewise, when attempting to evaluate and improve the CPI, it is important that researchers not only look for upward biases.

Despite numerous improvements that government statisticians in all countries, especially the U.S., have made historically and continue to make. Bureau of Labor Statistics (BLS), many of whom work under inadequate human and financial resource constraints, the dynamic change in the economy is difficult to keep up with.
New products are constantly being introduced, while others are leaving the market.
Many existing products are improved in a way that is objective–more energy efficiency, more durability, less maintenance, to name a few, while many more products claim to be "new and improved." In rich industrialized modern market economies, there are literally hundreds of thousands of goods and services available. A single supermarket can contain 30,000 different priced items and a WalMart store over 40,000, so it can be quite difficult to measure in a single index what happened to prices in a single store. It is much more complex to do so for the whole economy. As we have become richer, demand has increasingly shifted away from goods to services and to characteristics of goods and services such as improved quality, greater variety and greater convenience.