Author Question: What are the alternative measures of the price level and how do they address the problem of bias in ... (Read 16 times)

kellyjaisingh · **on:** Jun 29, 2018

What are the alternative measures of the price level and how do they address the problem of bias in the CPI?

What will be an ideal response?

Question 2

Make the argument that sales taxes could be considered as a regressive tax.

What will be an ideal response?

ndhahbi · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The first of three alternative price level is the chained CPI. The chained CPI is calculated in a similar manner as chained-dollar real GDP. The chained CPI overcomes the commodity substitution and new goods bias because it uses current as well as previous period quantities. The second alternative price level is the personal consumption expenditure deflator or PCE deflator. The PCE deflator is calculated from real and nominal consumption expenditure. The PCE deflator uses a broader basket of goods and services than the CPI and, similar to the chained CPI, is also calculated using a chained method. The third alternative is the GDP deflator. The GDP deflator is similar to the PCE deflator except the GDP deflator uses the prices from all the goods and services included in GDP.

Answer to Question 2

The argument is that people with lower incomes are likely to spend most or all of their income. Therefore the sales taxes they must pay will represent a larger portion of their income than people that make more income and who are better able to save.