The Council of Economic Advisers, an agency within the Executive Office of the President, is charged with offering the President objective economic advice on the formulation of both domestic and...

Answer to 4:
First indicator: Consumer prices
a. Consumer prices have been shown using consumer price index. “Consumer price index is a
measure of average change over time in the prices paid by u
an consumers for a market basket
of consumer goods and services.” It basically measures the overtime change in the price of a
particular basket of consumer goods and services purchased by households.
. Strength; 1) it is mostly commonly used measure of consumer prices; 2) most labor contracts
and other payment agreements that are linked to inflation rely on CPI;3) Being a fixed weight
price index, it helps in accurately measuring the prices changes over consumer goods and
services and 4) it is often used to convert the series in constant dollars.
Weakness; CPI suffers from many biases and because of that it often overstate inflation value.
These biases are;
1) When price of a good in the consumer basket has increased substantially, it is often seen
that consumers tend to substitute this good with lower priced alternatives. This change is
not reflected in the consumer price index as it is fixed weight price index and because of
that consumer price index suffers from substation bias.
2) Overtime, due to technological advances, we see rise in the quality and usefulness of the
product. For example; over the years, we have seen a substantial rise in the life of
automobile tires, reducing the cost of tire per mile, but CPI would not reflect such
improvements. This is called “Quality bias”.
c.
The value of CPI in most recent period (Sep, 2012) equals 231.414 (in case of seasonally
adjusted) and equals 231.407 (not seasonally adjusted).
d.
The value of CPI one year from now is likely to be near to 231.407. Specifically, it is likely to
increase upward by less than one percent from its cu
ent value of 231.407. This is because the
economy situation in United States is still very fragile and the economy is not likely to recover
soon. Therefore demand is expected to be at lower levels and hence we cannot expect a large
increase in inflation data.
e.
On the other hand, in coming five years, we would expect consumer price index to increase by
about 5-6%. This is because the economy is going through its recovery phase and as the recovery
picks its pace, the demand is expected to rise and therefore inflation is expected to rise over the
next five years.
Second indicator: Gross domestic products
a. Gross domestic product is defined as the value of total goods and services produced within
domestic te
itory of country during an accounting year. In other words, it is equal to total
income generated within domestic te
itory of country during an accounting year.
. Strength: 1) it helps in measuring the income generating capacity of the nation; 2) it helps in
measuring the economic growth of a nation; 3) GDP values and resulting growth rates allow us
to compare different countries in terms of their economic achievements and 4) it is the most vital
and commonly used measure of economic situation in a country.
Weakness; 1) GDP covers just the income aspect of economic wellbeing while the...