Question

Do you think perfect indexing is possible? Why or why not?

Short answer

No, it's not possible to have perfect indexing.

Step-by-step solution

Step 1. Definition

Indexing is defined as the use of some standard indicator as a yardstick. In economics and finance, field indexing is the statistical estimate for tracing economic data like inflation, GDP, unemployment, market returns, and productivity.

Step 2. Explanation

Indexing is perfectly done when we measure inflation accurately. And inflation is measured by two methods that are GDP deflator and CPI.

When we measure inflation by GDP deflator it includes the goods and services produced rather than goods and services consumed so this is not the accurate measure of inflation.

On the other hand, when we measure inflation by CPI it includes only goods and services consumed so this is not also an accurate measure of inflation.

Step 3.

And in both conditions, if the inflation is not measured accurately then how do we perfectly do indexing. So, it is not possible to do indexing perfectly because every method has lagged and we don’t use both methods at the same time.