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 happens because of various reasons which we discuss.

Step-by-step solution

Step 1. Definition

The quality/new goods bias is defined as the rise in the price of a fixed basket of goods over a period of time that tends to exaggerate the rise in a consumer's real cost of living.

Step 2.

The “quality/new goods bias” arises if we calculate the inflation rate based on a fixed basket of goods. This happens because of improvement in existing goods and new arrival of goods, the invention of new goods.

And if something is improved but the price becomes the same then the object is cheaper.