On curing the CPI's substitution and new goods bias (original) (raw)
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Consumer Prices, the Consumer Price Index, and the Cost of Living
Journal of Economic Perspectives, 1998
After presenting major findings and recommendations, the CPI Commission reiterates the estimate of a 1.1 percentage point per annum upward bias. It rejects the contention that the BLS already makes substantial corrections for quality change; that quality improvements and new products accrue only to the rich; and that procedures to make more extensive quality adjustments, valuations of new products, and adjustments for commodity and outlet substitution are impractical. The bias in the CPI can be sharply reduced, as the authors detail in this paper. Coauthors are Ellen R. Dulberger, Robert J. Gordon, Zvi Griliches, and Dale W. Jorgenson.
The Consumer Price Index the actual published value only approximates. The true value of the CPI is considered to be the true cost-of-living index, and so we begin with a discussion of the theory of the cost of living index. We progress to the construction of the actual CPI as it is reported every month, following the description of methodology in the Bureau of Labor Statistics' (BLS) Handbook of Methods. In the remainder of the article, we consider how well the CPI approximates the true cost-of-living index, paying particular attention to the problems of substitution, quality change, and the introduction of new goods, which are generally considered to cause the CPI to overstate the rate of increase in the cost of living or, alternatively, overstate the rate of inflation. 2 Some analysts have suggested that these measurement errors are so large that
The Lowe Consumer Price Index and its Substitution Bias
This note considers the Lowe consumer price index as an approxi- mation to a true cost of living index. A simple example, based on systematic long run trends in prices, is used to obtain some idea of the magnitude of the substitution bias. Corresponding author. The views expressed in this paper are those of the author and do not necessarily reflect the policies of Statistics Netherlands. Tel.: 31 70 337 4704; fax: 31 70 387 7429.
The treatment of substitution bias in consumer price index: An alternative approach
Statistical Methods & Applications, 2002
Substitution bias is a well-known problem in fixed-basket price indices. When a new product substitutes an old one, the most of statistical agencies adopt an ad hoc strategy, using the ratio between prices of the two goods (in a previous period) as a measure of quality change. In the present work we propose an alternative way to manage substitution that can be easily included in the computation process of the index. Price survey is a pure panel survey, and then substitution may be considered as an attrition problem and faced using the estimator for panels with partial overlap. After a brief description of the problem and of the suggested formula, an experimental application is presented. The application is based on about 771 elementary prices collected in Milano in March 1997. Main results are that in each category of consumption the two approaches show significant differences in the micro-indices, at the aggregated level, that is when weights are used to combine micro-indices, the differences agree with the conclusions of Boskin's report.
Main Aspects regarding the Consumer Price Index
Romanian Statistical Review Supplement, 2012
This paper reveals the usefulness of CPI concepts. The cost of living view provides a price index whose dual is the volume of household consumption. The inflation view provides a price index whose dual is the volume of households? final monetary purchases, which represent the demand pressure they put on the markets in which they participate.
The Impact of the Price Index Formula on the Consumer Price Index Measurement
Statistika: Statistics and Economy Journal, 2019
The Consumer Price Index (CPI) is a common measure of inflation. Similarly to the Harmonised Index of Consumer Prices (HICP), it is determined using the Laspeyres index, thus data on the consumption of the basket of goods do not have to be current. The Laspeyres index, using weights only from the base period, may not reflect changes in consumer preferences that occurred in the studied year. In the ideal case, the CPI should be measured by one of the so called superlative price indices, such as the Fisher, Törnqvist or Walsh index formulas. The main problem with such indices is that they need expenditure data from the current period. The aim of the article is to assess the impact of the choice of the price index formula on the CPI measurement. We verify differences among known index formulas at the lowest and some higher data aggregation levels. We use known bilateral unweighted and weighted formulas together with their chained versions.
Measuring the true index of cost of living under general equilibrium
2017
We show that the index of cost of living introduced by Konus (1939) is numeraire dependent in a general equilibrium setting. This dependency gives rise to ambiguity situations for the interpretation of the index. To correct for this ambiguity we show that we need to neutralize the standard Konus index using a price index. This correction eliminates the interpretational problem due to, and inherited from, the selection of the numeraire. We also provide a simplified expression of the index for the case of homothetic utilities. Two numerical examples show the discrepancies between the literal estimates, as they would be used under partial equilibrium, and the neutralized version. The discrepancies would give rise to erroneous assessments in the evaluation of the welfare effects resulting from the adoption of new policies.
A Unified Approach to Estimating Demand and Welfare
2016
The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers.