Second Group Discussion: Strengths, Weaknesses, and Uses of Price Indices – Group A

Description

Governmental entities use price indices to determine cost of living allowances (COLAs) and to make judgements about monetary policy. Since there are several price indices available, policy makers must make analytical judgements about which among the several available price indices is appropriate for determining COLAs and for guiding monetary policy. In making these judgements, one imagines that policy makers’ evaluation of the strengths and weaknesses of available price indices is critical in determining which price index will be used for any given policy purpose. After conducting a thorough review of how various price indices are constructed and their strengths and weaknesses thoroughly evaluate the accuracy of the following statement.

“The ultimate objective of both the allocation / administration of COLAs and of monetary policy is to enhance social welfare. Consequently, the consumer price index (CPI) is the price index that is most likely to lead to optimal allocation of COLAs and optimal monetary policy since the market basket underlying the consumer price index reflects goods and services purchased by the typical consumer whose welfare these policies are supposed to enhance”.

I suggest that you first familiarize yourself with the literature on price indices, paying special attention to how they are measured, what are their strengths and weaknesses, why they may or may not be appropriate for administration of COLAs, why they may or may not be appropriate for guiding the monetary authority in pursuit of its price stability goal. The following links will take you to articles that you should read in preparation to contribute to your group discussion. You should view these articles as the minimum reading you should do. The best discussions are undergirded by thorough research so do whatever amount of research is necessary to fully familiarize yourself with the underlying issues. For example, if your reading of the articles listed below leads you to other literature, by all means follow those leads. After you have done the research indicated above, write and share your evaluation of the statement with members of your discussion group. I expect you to comment on the posts of other members of your learning community and to have a discussion. See the rubric for clarity on my expectations.

How Does the Government Measure Inflation?

The Chained CPI

1999-A Comparison of the CPI and the PCE Price Index.pdf Comparison of the CPI and the PCE Price Index.pdf

wolman on K-Core Inflation.pdf