Re: standard of living

["Alan G. Isaac" <aisaac@xxxxxxxxxxxx>]

James,
The "price of steak" example does not assume a fixed basket.

It simply points out that the fact that one cannot afford
ones
old consumption basket after a price change does not mean
that one is worse off. This is the policy relevant point.
Specifically, would you personally feel adequately
compensated
for the imagined price change by, say, an extra $30,000/yr?
(That's half of what you'd need to continue to by your old
basket
in the example.) Understanding this example is to understand

why the CPI basket *should* be adjusted to reflect
substitution,
*if* the intent is for the CPI to be as reasonable a price
index
as possible. (This ignores intentions to, say, use the CPI
to
redistribute income in some politically preferred fashion.
One's view as an *economist* of CPI adjustment might differ
from one's view as an *advocate*.)
--Alan


> >> At 03:33 PM 10/6/97 -0400, Alan G. Isaac wrote:
> >> >However discussions on this
> >> >list make it clear that even people interested in
> economics
> >> >often just don't get it. (If I cannot afford my old
> bundle, they
> >> >say, I *must* be worse off!)

James R. Olson, jr. wrote:

> The problem I see with your steak example is that it
> assumes a fixed
> basket.  But my understanding of the CPI is that the
> basket is adjusted to
> reflect changes in patterns of consumption, and so any
> huge jump in the
> cost of a particular item should be reflected as a lower
> weighting for that
> item in the basket, unless it's subject to the potato
> paradox.