Calculation of the Consumer Price Index

Strengths Weaknesses

Simple principle (setting a price for a fixed sample of goods and services , which are representative of the market , over a period of time

Ideal reference (i .e . based on the regional and industry detailed reports of prices ) for investors for research or other purposes

Objective and relies on actual accounts of price changes for the fixed and representative commodities of the market . Variations of prices of the goods and services , within the period of interest for the calculation of price index , which may cause consumers to buy other goods

br and services

Fixed CPI has certain biases (new product , substitution , which can distort results excludes impact on welfare resulting to introduction of a new good if the good is not due to price reduction but of advances in technology

CPI does not take note of the goods and services that a household in the rural area consumes Table SEQ "Table " \ Arabic 1 : Comparison of the Strengths and Weaknesses of the Consumer Price Index

The Consumer Price Index 's strength is due to the concept that it is based upon . It is very straight forward and easy to understand . The CPI sets a price for a fixed pool of goods and services that , by study , is representative of the market . This means that the goods and services are most likely the same goods and services that a market buys from one period to another . This is data is usually surveyed upon and is recorded , and is even maintained online , for future reference by investors for their market research , etc , by the media for their reporting purposes , and even us students for our course work . The CPI is especially objective in such a way that the prices of the fixed and representative goods and services are based on survey answers by actual households . This covers the usual commodities that the household buys and the CPI assumes that the same household will buy the same goods and services for the next period . However , the Consumer Price Index 's strength is also the CPI 's source of weakness . The CPI does not take into account that the consumer might deviate from the fixed goods and services that they initially assigned due to fluctuations in prices within the period of CPI calculation . And having a fixed basket of goods and services may not become representative in the long run due to consumers preferring goods and services , not because they are cheaper anymore . Consumers prefer these because these new goods and services provide them more convenience , most especially with the emergence of new technology . In doing so , the concept of having fixed ' goods and services as an initial assumption for CPI calculation becomes null Lastly , CPI does not take into consideration the goods and services that a household from the rural area buys , so this may cause some inaccuracies in the CPI calculation , given that the assumption is that there should be a fixed ' and representative ' pool of goods and services

CPI , even...