G Compare inflation measures, including their uses and limitations

Question 1

Laspeyres Index (how we calc the price index)

Answer 1

Uses a constant basket of goods and services

Limitations: NEw goods, quality changes (Hedonic Pricing (adjusts for product quality), and substitution(chain or chain-weight using fisher index [geometric mean of Laspeyres and a Paasche index[uses current consumption weights, prices from base period, prices in current period.] to solve)

Laspeyres index to bias upward as a measure of the cost of living.