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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: ild who wrote (19851)10/12/2004 8:50:11 PM
From: CalculatedRisk  Read Replies (1) of 110194
 
Gross uses a poor example: "Say the only product that Americans purchase and consume are bags of gumdrops – 100 to a bag that cost $1.00 per bag, with each citizen limited to 1 bag. Through the miracle of productivity, a way is found to fill each bag with 110 gumdrops that is now priced at $1.10. The government’s hedonic adjustments would now calculate that the bag really only costs $1.00 and that the CPI has not gone up. After all, each gumdrop in the bag still only costs a penny does it not? It does. But here’s the catch and the con. The price of a gumdrop hasn’t gone up, but the cost of a bag of gumdrops has. Because Americans must buy 1 bag as opposed to individual candies, their cost of living has increased by 10%."

If someone bought 11 bags per year (at 100 gumdrops per bag) that is 1100 gumdrops. When the quantity per bag increases, the consumer would then buy 10 bags per year = 1100 gumdrops. The price per year would be the same and the consumer's CPI would not change.

Gross is correct on many other items. If a computer increases performance by 2, and the price stays the same, hedonic pricing says the computer price dropped in half. That is not true. For most people there is no additional benefit to the faster computer.
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