Respuesta :
The substitution bias causes an inflation rate calculated using a fixed basket of goods over time to overstate the true rise in the cost of living because it does not take into account that people can substitute away from goods whose prices rise disproportionately.
Explanation:
When the price of a good rises, consumers tend to purchase less of it and to seek out substitutes instead.
On the other hand , if the price of a good falls, people will tend to purchase more of it and not opt for its substitutes
This concept implies that goods with generally rising prices should tend over time to become less important in the overall basket of goods used to calculate inflation, while goods with falling prices should tend to become more important for the calculation of inflation
The quality/new goods bias causes inflation calculated using a fixed basket of goods over time to overstate the true rise in cost of living because improvements in the quality of existing goods and the invention of new goods are not taken into account.
The impact of the change with respect to the amount of substitution bias and quality/new goods bias is explained below:
The following information should be considered:
- Due to the basket would reflect what people are actually purchasing
- In addition to this, it will take account that with increasing prices consumers might substitute products due to the law of demand
- Also, there will be improvements to make higher quality products.
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