The Recovery and Investment Plan to Rebuild the American Economy after Essay

The Recovery and Investment Plan to Rebuild the American Economy after Recession - Essay Example The Boskin commission states that accurate measures in the costs of living are among the most useful and important data necessary to evaluate economic performance. The living cost change between two periods indicates how much income people would have needed in the previous period given the price of goods and services available then. For example if a family with $15,000 income in 2000 would have needed $45,000 in 1999, then the cost of living has dropped by two thirds. The commission argues that the complexity of the dynamicity of the economy should not be reasons to bemoan the difficulties in the construction of an accurate cost of living index.It highlighted sources of possible bias and further suggests improvements to the various official statistics currently used as proxies for changes in the cost of living like the consumer price index that measures the cost of purchasing a fixed market basket of goods and services. The CPI is calculated, while keeping the weights fixed through t ime, by attempting to measure changes from one month to another in prices of the same or quite closely related goods and services. But this weights would no longer reflect what consumers are actually purchasing because through consumption baskets change in part because of changes in the relative prices of goods and services. Where the purchases are made also do change just like consumers do change their purchases. The current methodology suffers from outlet substitution bias that insufficiently takes into account the shift to discount outlets. This occurs when shifts to lower price outlets are not properly handled.