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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Don Lloyd who wrote (87201)	12/19/2000 2:10:40 PM
From: IceShark	Respond to of 132070

but I would have thought that the geometric weighting and the substitution effects were separate and independent, and not tied together. No, they are precisely one and the same. You have to sum up a multitude of goods and services at various price levels. There are two primary ways to do this at issue here. The old arithmetic weighting technique creates the CPI by measuring how much a consumer's spending would have to rise, when prices rise, assuming that a consumer continues to buy exactly the same mix of products. The new geometric method assumes that consumers would substitute cheaper alternatives, so the goods that go up in price are discounted out of the CPI, either in part or entirely, and substituted with cheaper alternatives. Think steak and chicken. A lot of tricks can be played here and this inconsistent with other practices such as hedonic pricing, where the calculated price drops even though the actual price rises, due to hedonic improvements. If all you use a car for is some very basic transportation needs you may not really care about all the frills such as airbags and cup holders and crash protection but you can't substitute down because no one makes very basic transport anymore, unless you want to drop down to bikes. -g-