Cost Of Living Essay

Measuring the Cost of Living - The Impact of Technology on our Standard of Living

Measures of the cost of living, like the retail price index (RPI), are inadequate, failing to reflect fully the impact of technological advances on our standard of living. This leads to a substantial upward bias in our estimates of inflation, perhaps as much as 1.6% a year. That is the contention of Professor William Nordhaus of Yale University. If he is right, then we may have to rewrite history:

l Increases in the price of lighting services since 1830 may have been overestimated by as much as a thousandfold!

l US real wage growth between 1959-95, currently measured at a very modest 10%, should be revised to a healthier 70%.

l And estimated average

Ideally, they are designed to measure the cost of attaining a given level of economic well-being. In practice, statisticians take a ‘basket of goods’, which represents the consumption patterns of the ‘average consumer’, and measure how the cost of this fixed basket changes over time.

This statistic is used to define ‘inflation’, and hence determines changes in a wide range of inflation-indexed state payments and benefits, as well as setting the background for pay settlements. It is also crucial for measuring the real growth of the economy, a key statistic in assessing the economic and political performance of the economy and government policies.

Nordhaus argues that the current methods for measuring the cost of living are inadequate and fail to reflect fully the impact of technological advances on the standard of living. One of the basic problems with the ‘basket of goods’ approach is that consumption patterns change: while this is partly due to changes in taste and fashion, it is also due to the impact of technological change on the products we

First, the basket of goods only takes up new products with a lag: in periods of rapid change and innovation, this can lead to big errors. Second, there has been an in-built tendency to underestimate the services provided by new products and developments of existing products. New cars provide a range and level of services far superior to the cars of 10 or 20 years ago. Nordhaus argues that if you look over a longer historical timescale, then the comparisons can be completely misleading. Increases in the price of lighting services since 1830 may have been overestimated by as much as a thousandfold! While lighting may be an extreme example, the same principle applies to many other consumer