Explain the difficulties in measuring inflation accurately [8 marks] (18 minutes)

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Explain the difficulties of measuring inflation accurately. [8]

The term inflation refers to a sustained increase in the general price level of goods and services within an economy over a given period of time. The annual inflation rate is calculated using either the consumer price index (CPI) or retail price index (RPI), in relation to a base year; in this base year, a relevant basked of commonly consumed goods and services are chosen and their price levels are recorded, then, their relative weights are determined depending on their relevance within basket. Once all of the prices have been adjusted for their respective weights, the price level within the base year is determined and is assigned the value of 100. In the following years, a similar process of finding a weighted average of the prices of relevant goods and services is carried out, then, the difference between the price level in the current year and the base year is divided by the original price level in the base year, thus measuring the annual inflation rate.
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Due to the nature of the process required for the measurement of inflation, several potential inaccuracies arise. One such inaccuracy results from the need of basket of products to be regularly and thoroughly updated. Due to advancements in manufacturing technology, improved training, discovery of new technologies, changes in consumer tastes and various other factors, both the items within the basket and their weights can quickly become outdated or inaccurate. For example, while a tube television might have been less expensive 20 years ago than a modern television, considering both to be equivalent within the price index would be ...

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