There are several problems with using the CPI to calculate real GDP and measure growth. One of these problems is that the CPI does not account for changes in the quality of goods sold over time. A computer today is significantly more efficient than it was even just ten years ago, so even if the price of computers rise with inflation, you are getting significantly more computing power per dollar. How would this bias estimates of GDP growth and inflation?

There are several problems with using the CPI to calculate real GDP and measure growth. One of these problems is that the CPI does not account for changes in the quality of goods sold over time. A computer today is significantly more efficient than it was even just ten years ago, so even if the price of computers rise with inflation, you are getting significantly more computing power per dollar. How would this bias estimates of GDP growth and inflation?

 

 

Answer:

Likewise CPI, these changes in quality and efficiency are not included in GDP and inflation estimates. This is majorly because it is difficult to quantify quality and efficiency. Similarly, there are other things like pollution which are not counted in GDP or inflation which makes these estimates biased.

Asked on February 15, 2018 in economics.
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