Question

Pick a good you are familiar with. Explain how its quality has changed and why it might be difficult for a price index to capture the increase in quality.

Answer 1

Goods or services undergo changes in terms of quality and this might result an increase in the price of the good or service. Over the years, quality of various products has undergone a change, for instance, televisions which have become adapted the smart technology. The price increase could be because of the increase in quality but often price indexes which are constructed by taking a basket of goods and services do not consider the quality aspect into consideration.

It cannot be said that the quality aspect cannot be included completely. The quality adjustment in the Consumer Price Index(CPI) takes a fixed basket of goods and services are considered over time and using the hedonic quality adjustment removes price differentials that arise because of change in the quality of the goods or services.