16082_12.22_000009138140XSmall

A Price Story

Dec 22, 2010 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 183 Views    No Comments

Do you think that the BPP is more accurate than the CPI?

Based at MIT, The Billion Prices Project (BPP) monitors close to 5 million items sold by approximately 300 retailers in 70 countries. Using the BPP, we can choose a country and then see, on a daily basis, what is happening to prices. In Argentina, for example, prices have been rising at an annual rate of 20% while in the U.S. the annual rate is closer to 2%.

The Consumer Price Index, the more traditional yardstick of prices in the U.S., is a monthly statistic. Described in this Planet Money podcast, the data for the CPI is gathered by people who record prices for the same specific products, month after month. One person could be following a certain type of dress while another looks at grapefruits. With certain items given more (mathematical) weight then others, the goods and services in the CPI form an imaginary market basket whose price fluctuates. 

Which type of yardstick should our government use for making policy decisions?

The Economic Lesson

When prices go up or down too much or too fast, they create problems. Businesses can’t plan for the future so they produce less. Consumers cannot plan so they buy less and save less. Workers experience vast swings in the purchasing power of the money they earn. When prices change too much, the information they represent becomes increasingly meaningless until, as in Zimbabwe, supermarkets refuse to stock their shelves.

As discussed by Dr. Robert Whapples in a Teaching Company Lecture, economies function better when prices are relatively stable. To achieve price stability, monetary and fiscal policy makers need information from the CPI and other price indexes.

So, when the price of gas rises from $1.40 to $3.00, drivers and policy makers respond.

 

Related Posts

« »