defining a medical “good,” involvement of insurers and government in transactions, pricing risk, and how adjusting medical care prices to account for the quality of outcomes can lead to strange results. The chapter also discusses “outcomes” and direct insurance pricing options.

Chapter 7 examines the relationship between each of the major purposes for which the CPI is used and the appropriate design of the index. It considers the extent to which different index designs are required for different purposes and when a single design can serve as an acceptable measurement instrument for many purposes. It also spells out the implications for various public policy purposes of choosing one index design over another.

Chapter 8 describes the issues that are confronted when a single index must be produced to represent the changes in prices or living costs faced by a heterogeneous population. It emphasizes problems that arise because different consumers buy different types and qualities of goods and pay different prices for them.

Chapter 9 provides an overview and assessment of the current data structure that underlies the CPI and considers ways that data and survey advances might be coordinated to improve the accuracy of the CPI. It also describes the extent to which different data structures permit flexibility in constructing alternative or supplemental indexes (such as for subpopulations).

ALTERNATIVE APPROACHES: A COGI VERSUS A COLI

Between a policy of continuing a traditional COGI with modest changes and one of attempting the modifications necessary to produce a cost-of-living index that reflects the most comprehensive definition of the “standard of living,” there is a wide range of intermediate possibilities. Indeed, starting from either basic approach—the fixed-basket price index or the cost-of-living index—many of the same kinds of questions must be faced.

If one thinks of a “simple” fixed-basket index and a comprehensively defined COLI as opposite ends of a spectrum, it is clear that neither alone provides an operational model with which a CPI can be constructed. For example, in a modern innovative economy, even over a relatively short period of time, the characteristics of a wide range of goods and services are constantly changing. When consumers pay more for a new model of a good, how much of that represents a true price increase and how much a payment for higher quality? Moreover, goods with completely new characteristics, like DVDs, come to the market and gradually take over some or all of the market for other goods. In the case of a COLI, the complexities, lack of data, and deviations from the assumptions of the theory that are sometimes encountered in the real world impose limits on the extent to which its implied objective can be achieved. Attempting to push beyond those limits risks introducing an unacceptable amount of subjectivity and the possibility of significant error into index measurement.



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