How to calculate the a price index, Microeconomics

Why does a price index based on constant weights tend to overstate inflation in periods after the base year when the price of one good is rising quickly compared to other goods?

Because people tend to buy cheaper substitutes instead of the good whose price is quickly increasing.  But the constant-weight index includes the similar quantities of the expensive goods.

 

Posted Date: 8/1/2013 3:56:09 AM | Location : United States







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