The Difficulty of Measuring the Cost of Living
Cost of living is designed to measure the costs of maintaining living
standards of working- class households. It was first introduced in
It is difficult to measure the cost of living because prices are
constantly changing, meaning cost of products will change too. Prices
will change for instance due to increases in costs or inflation, so if
a can coke was $1 in 2000, due to an increase in wage demands, costs
have increased and thus the selling price of coke has increased to $2
in 2001. This happens to many commodities in the market and as a
result of that it is difficult to measure the price of products as
that are constantly changing over a period of time.
The quality of products also changes, however this will appear on the
cost of living index. For instance computers, CD players, televisions
are of better quality now than they were before and that is why their
prices have increased. However only the price of the product will be
mentioned in the index, not the fact that its quality has been
improved. Their design and performance also changes. So a price change
will accompany the introduction of a new model or an improved design.
Therefore it is difficult to assess the real nature of the price
change. An example is the price if BMW cars has increased by 10
percent, but the quality, performance and design of the new model is
much better and superior to that of the older model, has the exchange
value increased or decreased?
Tax also affects the cost of living because; changes in indirect taxes
will affect te goods and services we purchase. Taxes will either
increase or decrease due to the fluctuating inflation rate. Changes in
the indirect tax such as VAT will be shown in the RPI. Government
price subsidies also affect goods and services prices and influence
the index making it hard to measure the cost of living.
How do you calculate the average spending of people in a country?
Everybody had different spending habits, not everyone buys the same
times or the same quantity of the same items? Therefore who is the
average spender out of millions of people in a country? What is the
average sized family in order to find out the average spending on the
cost of living? Therefore it is not a good guide how the cost of
living has changed for groups whose...