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22 September, 09:41

What are the three effects that bias the measurement of CPI

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  1. 22 September, 11:15
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    Answer: Consumer price index (CPI) is weighted price index of basket of good that a consumer purchases each month. CPI is fixed in nature. It is an economic indicator. A rise in CPI indicates consumer inflation rate. The are type of bias that effects the measurement of CPI are: substitution bias, quality bias and outlet bias.

    Explanation: Following are the bias:

    Substitution Bias - it arises when prices in the consumer basket increases and consequently low price alternatives or substitutes are opted by the consumer. As we know CPI is fixed-weight price index so the impact is not predicted accurately. Quality bias - It arises when any increase in technology increases the quality life of a product. Constant change in the quality of the product again does not reflect in consumer price index. Outlet bias - consumer shifts to new places or outlets as per their taste and preferences which is again not well represented by the CPI.
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