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Lowe and Cobb-Douglas Consumer Price Indices and their Substitution Bias

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  • Bert M. Balk

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    (Rotterdam School of Management, Erasmus University)

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    Abstract

    Catching the effect of substitution behaviour in a Consumer Price Index (CPI) as good as possible is a goal pursued by statistical agencies throughout the world. The difference between a CPI and a certain target cost-of-living index is called substitution bias. Balk and Diewert (2003) considered the substitution bias of a Lowe Consumer Price Index; see also CPIManual (2004: Chapter 17). The present paper considers the substitution bias of a Cobb-Douglas (or Geometric Young) CPI, and compares the two price indices with respect to their substitution bias. It appears difficult to draw a clear-cut conclusion.

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    Bibliographic Info

    Article provided by Justus-Liebig University Giessen, Department of Statistics and Economics in its journal Journal of Economics and Statistics.

    Volume (Year): 230 (2010)
    Issue (Month): 6 (December)
    Pages: 726-740

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    Handle: RePEc:jns:jbstat:v:230:y:2010:i:6:p:726-740

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    Related research

    Keywords: Index number; cost-of-living index; Lowe index; Cobb-Douglas index; Geometric Young index;

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    1. Diewert, W.E., 1993. "Duality approaches to microeconomic theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 12, pages 535-599 Elsevier.
    2. Balk,Bert M., 2008. "Price and Quantity Index Numbers," Cambridge Books, Cambridge University Press, number 9780521889070.
    3. Diewert, Erwin, 2009. "Cost of Living Indexes and Exact Index Numbers," Economics working papers erwin_diewert-2009-6, Vancouver School of Economics, revised 13 Feb 2009.
    4. William Barnett & Apostolos Serletis, 2008. "Consumer preferences and demand systems," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200801, University of Kansas, Department of Economics, revised Jan 2008.
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