Since late 2006, OPEC has successfully raised world oil prices significantly.These price increases have caused inventors to explore alternative sources of energy, for example bio-fuels.Consumers too have started switching toward hybrid automobiles and toward automobiles that use bio-fuels, both of which are cheaper to operate than gasoline engines.Which problems in the construction of the CPI does this situation represent?

Question

Quizplus · Accepted Answer

The situation described represents the problems of substitution bias and introduction of new goods in the construction of the CPI. The rising oil prices have caused consumers to switch to alternative sources of energy, which are not reflected in the CPI basket of goods, resulting in a substitution bias. Additionally, the introduction of new goods such as bio-fuels is not captured in the current CPI basket, leading to the problem of introduction of new goods.

Since Late 2006, OPEC Has Successfully Raised World Oil Prices