Question

Why does the “quality/new goods bias” arise if we calculate the inflation rate based on a fixed basket of

goods?

Short answer

this is because because improvements that are made in the quality of existing goods and the invention of new goods are not considered.

Step-by-step solution

Step 1. Quality/ new product of bias

this is type of bias occurring at an early stage that is introductory stage where the product is not a commonplace item and is not captured by the index. The result of this is substantial decrease in price and quality increase at introductory stage.

Step 2. the “quality/new goods bias” arise

Now a situation where the fixed price of goods and services constantly tends to increase as a result to quality increase of the product. Because of this inflation may overstate and living expense of consumers will tend to increase. However rise in inflation will be neglected due to increased quality of product which means better standard of living.