Question

The Radio Shack commercial from 1989 showed a cell phone that was sale priced at $799. What type(s) of problems with measuring consumer prices is illustrated by the cell phone example? Explain.

Answer 1

During 1989, the price of a cell phone was $799.

If we use 1989 as a base to estimate consumer prices with regard to mobile phones , we would be over estimating the consumer price.

As technology improved and the amount of production increased, the price of a cell phone is much lower than $799 today.

If we continue to use the price at year 1989 for measuring real GDP , we will be overestimating the real

consumer price as we produce much larger amount of cell phones currently.

A large price multiplied by a large quantity will give an even larger consumer price.

Hence over estimation is a problem while using prices of 1989.