Suppose there are only two goods (Good A and Good B)and the average person buys 4 of Good A in a year and 3 of Good B. If, in the base year, the Price of Good A is $5 and the Price of Good B is $10, and in the next year the Price of Good A is $6 and the Price of Good B is $9, one problem with the CPI way of calculating inflation is

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The CPI (Consumer Price Index) measures the change in prices of a basket of goods and services over time. One problem with the CPI calculation is that it assumes that consumers will continue to purchase the same quantities of goods, regardless of price changes. In reality, consumers may choose to substitute one good for another if the relative prices change. In this case, if the price of Good A has increased more than the price of Good B, some consumers may choose to substitute Good B for Good A. The CPI calculation does not take this substitution effect into account and therefore may overstate the degree of inflation.

Suppose There Are Only Two Goods (Good a and Good