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 Goods A and B both increase by 5% at the same stores but Good A is much less likely to make you sick than it had been, what is the problem with the CPI way of calculating inflation that is apparent

Question

Quizplus · Accepted Answer

The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. However, it does not account for changes in the quality of goods. In this scenario, Good A has become less likely to make you sick, which is a quality improvement. The CPI calculation would only consider the price increase and not the quality improvement, leading to an overstatement of inflation because the actual value received by consumers for Good A has increased due to the quality improvement.

Suppose There Are Only Two Goods (Good a and Good