Economics Principles and Applications.

When that happens. the data gatherer goes through a four-page checklist of features such as screen size and the type of remote control to find the nearest comparable model. Once this process identifies a product that appears to be the closet match. the data gatherer notes its price. The commodity specialists back in Washington check over these choices and decide whether to accept them Many price adjustments in the CPI are straightforward: When candy bars get smaller. but are sold for the same price the CPI reflects that as a price increase Todd Reese. the commodity specialist for autos. says he doesn’t need hedonics to extrapolate the value of quality changes. because auto makers present him with a list of changes to the car and the corresponding prices. Still. Mr. Reese must make some tough calls as he does his job. For instance he recently considered a 2005 model in which the sticker price went from $17.890 to $18,490. The manufacturer cited an extra cost of $230 to make anti lock brakes standard. while it said it saved $5 by dropping the cassette portion of the CD player The bureau accepted both those items, so the ostensible price increase shrank by $225. But the car maker also told Mr. Reese it wanted to subtract $30 from the price increase for the cost of putting audio controls on the steering wheel, allowing drivers to change channels without reaching for the radio dial. We didn’t allow that claim,” says Mr Reese. “We didn’t judge that to be a functional change.

basket of goods of constant quality. Despite these efforts, changes in quality remain a problem because quality is so hard to measure There is still much debate among economists about how severe these measurement problems are and what should be done about them. Several studies written during the 1990s concluded that the consumer price index overstated inflation by about I percentage point per year. In response to this criticism, the Bureau of Labor Statistics adopted several technical changes to improve the CPI, and many economists believe the bias is now only about half as large as it once was. The issue is important because many government programs use the consumer price index to adjust for changes in the overall level of prices recipients of Social  Security, for instance, get annual increases in benefits that are tied to the consumer price index. Some economists have suggested modifying these programs to correct for the measurement problems by, for instance, reducing the magnitude of the automatic benefit increases.

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