Japan Updates its CPI Basket

Answer the following questions to check your understanding of the story.

What does the CPI market basket contain?

Goods and services ______________.

a) produced by the average firm

b) produced domestically and bought by average urban consumers

c) bought by all consumers, weighted by their share of the consumer budget

d) bought by average urban consumers, weighted by their share of the consumer budget

Wrong! - The CPI measures consumption, not production. The basket represents urban consumers only and includes domestic and imported goods.

Good Job! - The basket represents what average urban consumers buy, weighted by each item's share of their budget.

Why is the CPI market basket updated periodically?

The CPI market basket is updated periodically to _____________.

a) measure changes in prices

b) reflect changes in what firms produce

c) remove imported goods

d) reflect changes in household spending patterns

Wrong! - The basket reflects household purchases including imported goods, not firms' production. Price changes do not change the composition of the basket.

That's Right! - Updating the basket keeps its items and weights aligned with what households currently buy.

If the CPI basket is not updated, does a shift from formal to casual office wear make the CPI less accurate?

a) The basket uses inaccurate spending weights.

b) The shift in demand changes clothing prices.

c) Keeping the same basket prevents inaccuracy.

d) Changes in consumer preferences do not affect CPI accuracy.

Wrong! - The inaccuracy comes from outdated weights, not simply from a change in demand. A fixed basket becomes less accurate as consumer preferences and spending patterns change.

Well Done! - The old basket gives formal wear too much weight after consumers buy less of it.

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