A widely acknowledged problem with using the consumer price index as a measure of the cost of living is that it fails to account for the introduction of new goods.
More about consumer price index and its problem-
- A more accurate indicator of a nation's standard of living than per capita GDP is the consumer price index or CPI.
- It is based on the total cost of a fixed basket of goods and services purchased by an average customer in comparison to the cost of the same basket in a base year.
- The CPI can get a precise assessment of the cost of living by including a wide range of thousands of items and services with the set basket.
- It's crucial to keep in mind that the CPI is an index number or a percentage change from the base year rather than a monetary value like the GDP.
- Because CPI is based on a fixed basket of products, the CPI does not provide an entirely accurate measure of the cost of living, despite being a convenient approach to calculate the cost of living and the relative price level over time.
- The bias against substitution, the introduction of new products, and quality variations are three issues with the CPI that should be mentioned.
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When a company earns income, it becomes larger because net assets have increased. Even if a portion of the profits is later distributed to shareholders as a dividend, the company has grown in size as a result of its own operations.
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Question: Explain if there is excess supply or demand of goods at the equilibrium price and why?
Answer: Equilibrium is at the point where supply and demand meet and the prices are set. Since the price is set as a equilibrium, there won't be an excess to either, but if you set the price above equilibrium, you move away from equilibrium and have disequilibrium create excess supply or excess demand!
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This expanding panic and rising flood of withdrawals is called Bank Run.
<u>Explanation: </u>
Bank run means many customers of the bank withdraw their deposits due to the fear that the bank might become insolvent. When many customers withdraw their funds then the bank might not be able to meet the withdrawals with the available funds.
This further increases the risk of the bank to default when all the customers withdraw their deposits. This is because the banks hold only little amount as cash in hand while the rest of the bank's wealth is invested in long term assets.