Which of the problems in the construction of the CPI might be illustrated by each of the following situation? Explain.

Investing manufactory of SamSung in Vietnam

The construction of the Consumer Price Index (CPI) can be subject to several problems or limitations. These problems can impact the accuracy and reliability of the CPI as a measure of inflation. Let's analyze how each of the following situations might illustrate some of these problems:

1. Substitution Bias:
Substitution bias refers to the assumption made in the CPI calculation that consumers are not responsive to changes in relative prices and tend to maintain the same consumption patterns. In the case of Samsung investing in a manufacturing facility in Vietnam, it might lead to a problem in capturing this substitution effect. If the investment in Vietnam leads to changes in the relative prices of Samsung products, consumers might substitute those products with alternatives. However, if the CPI does not adequately account for this substitution effect, it may not accurately reflect changes in the cost of living for consumers.

2. Quality Change:
Quality change refers to the improvement or degradation in the quality of goods and services over time. In the case of Samsung's investment in a manufacturing facility in Vietnam, the CPI might face challenges in capturing any quality changes that occur. If the investment results in a higher quality of products or services offered by Samsung, the CPI might not fully account for this improvement. As a result, the measured inflation may be underestimated, as consumers are getting more value for their money.

3. New Product Bias:
New product bias occurs when the CPI fails to adequately account for new products or technological advancements that enter the market. In the case of Samsung's investment, if it leads to the introduction of new products or technologies, the CPI might struggle to capture these changes in a timely manner. It may take some time before the CPI includes the price adjustments for these new products, resulting in an underestimation of inflation.

To address these problems and improve the accuracy of the CPI, statistical agencies are constantly reviewing and updating their methodologies. They make adjustments to account for substitution effects, quality changes, and the inclusion of new products. However, these adjustments can be challenging to implement promptly, and there may be some lag time before the CPI accurately reflects changes in consumer behavior and market dynamics.