How do I define the strengths and three weaknesses of the Consumer Price Index c?
What are the characteristics of the items listed as weaknesses?
If the CPI is imperfect, why do we use it?
What are the five steps to calculate CPI for hotdogs and hamburgers
Answer:
This sounds like a test question.
Remember that CPI reflects a basket of goods and its change in nominal price over time. The basket is supposed to apply to the "average consumer" but if there are few average consumers, or if the tastes of the average consumer change, then the basket is really irrelevant. Also note that while CPI posits a standard against which accurate measurement can be made, it cannot account for substitution effects and wealth effects due to changes in relative pricing of substitute and complementary goods not included in the basket. Finally, CPI may leave out important components, and may not apply in all regions due to substantial price differentials (ie, a 2-bedroom apartment in Springfield, MO costs about $400 a month, but the same would cost $2,000 a month in New York City).
As far as using the CPI, there aren't many good options. One could use a price deflator, but this is less specific.
I don't think there are five steps to calculate a CPI. Rather:
(1) Pick your base year for comparison.
(2) Fix your basket (ie, 22 hotdogs, 13 hamburgers) to the base year.
(3) Find prices of the base year basket for each year's prices.
(4) Divide the total cost of each year's basket by the base year's basket and multiply by 100. This is your index.
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