Tuesday, October 12, 2010

Price Indices

In econ101b next term, you'll learn about inflation. Inflation is the phenomenon of rising prices and the term is applied to individual prices and prices more generally. Inflation matters: One of the main goals of macroeconomic policy is to keep prices low and stable, one way or another. This is important because if prices are low and stable, they are predictable, and consumers know how much they need to spend, as do firms, making rates of return on investments a safer proposition.

The question, of course, is exactly how do you measure it? Official statistics are usually what are called Consumer Price Indices (CPIs). But they are based on a basket of goods (literally, the types of goods the "average" family buys), and hence measure the changes in prices of these goods.

But who is this average family, and is this really the most important thing for government policy to be targetting? Already people are asking whether it makes sense when the kinds of goods poor folk buy are very different to the kinds of goods rich people buy (see here), but the latest development is perhaps not entirely surprising: The Google Price Index.

The idea is that Google will use the ridiculous volumes of information it has at its disposal to measure inflation - just how much are prices changing of the goods that people are actually buying (based on what they do on Google?). There are many possible advantages of such an index - it could be released daily (whereas official statistics are monthly), and it would likely be easily updated to reflect new trends in consumption (it is commonly reported (but I can't find a link!) that until very recently candles were still a main item in the CPI calculation).

If you're unaware of the many things Google has done since it has had Hal Varian as its Chief Economist, there is at the bare minimum Google Trends and its use for things like prediction Bird Flu from internet searches.

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