Question

Determine the most appropriate price index to use in each of the following situations and provide justification for each answer.

1.      Chris is writing a research paper on the automobile industry. She needs to include a discussion of how higher costs of production have affected U.S. auto producers. What price index should she use?

2.      Charles works as an economist for the United Mine Workers. He is developing the justification for the pay raise the union is seeking from management in its new contract. What price index should he use?

3.      William is a television reporter. He is preparing a documentary on the status of the U.S. economy. His documentary will focus on all sectors of the economy. What price index should he use?

4.      In November, Lucy volunteered to compute the value of her grandmother’s Social Security payments for the following year. What price index should she use?

Thank you guys!

Answer 1

1. Since, US auto producers use a lot of raw materials like steel, energy, etc. which they purchase in bulk, Chris should use "Wholesale Price Index" (as WPI is constructed using price of these raw materials).

2. Since Mine Workers are industrial workers, Charles should use Consumer Price Index for Industrial Workers, CPI(IW).

3. Since William is preparing documentary on the status of "US Economy" and it "covers all the sectors of economy" and economy is typically measured by GDP, he should use GDP deflator which gives a measure of price changes in the economy as a whole.

4. Since Lucy's grandmother is a consumer and uses her social security payments on consumption, Lucy should use Consumer Price Index to calculate the value of social security payments.