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Axiomatic and Economic Approaches to Elementary Price Indexes

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  • W. Erwin Diewert

Abstract

In a 1993 paper, Marshall Reinsdorf finds that the CPI components for food and gas were biased upward by about 2% and 1% per year respectively during the 1980s. He attributes this result to outlet substitution bias. The more recent paper by Reinsdorf and Moulton [1994] presents an alternative explanation for Reinsdorf's earlier results: when the BLS moved to probability sampling of prices in 1978, the micro price quotations were aggregated together using an index number formula that generates an upward bias. This paper further explores the central theoretical issue raised by the Reinsdorf-Moulton paper: the choice of an index number formula to aggregate prices at the finest level of disaggregation. This issue is examined from both axiomatic and economic perspectives. This paper also reviews the empirical literature on alternative elementary price indexes, and the recent literature on sources of bias in consumer price indexes. The findings of this paper in conjunction with the empirical work of Reinsdorf and Moulton yield a number of recommendations for Statistical Agencies which are outlined in the final section.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5104.

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Date of creation: May 1995
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Publication status: published as W. Erwin Diewert, 1999. "Axiomatic and Economic Approaches to International Comparisons," NBER Chapters, in: International and Interarea Comparisons of Income, Output, and Prices, pages 13-107 National Bureau of Economic Research, Inc.
Handle: RePEc:nbr:nberwo:5104

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  1. Robert B. Archibald, 1977. "On the Theory of Industrial Price Measurement Output Price Indexes," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 57-72 National Bureau of Economic Research, Inc.
  2. Blackorby, Charles & Donaldson, David, 1980. "A Theoretical Treatment of Indices of Absolute Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 107-36, February.
  3. Berndt, Ernst R & Griliches, Zvi & Rosett, Joshua G, 1993. "Auditing the Producer Price Index: Micro Evidence from Prescription Pharamceutical Preparations," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 11(3), pages 251-64, July.
  4. Sidney N. Afriat, 1972. "The Theory of International Comparisons of Real Income and Prices," NBER Chapters, in: International Comparisons of Prices and Output, pages 11-84 National Bureau of Economic Research, Inc.
  5. Balk, Bert M, 1990. "On Calculating Cost-of-Living Index Numbers for Arbitrary Income Levels," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 75-92, January.
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Cited by:
  1. Silver, Mick & Heravi, Saeed, 2007. "Why elementary price index number formulas differ: Evidence on price dispersion," Journal of Econometrics, Elsevier, Elsevier, vol. 140(2), pages 874-883, October.
  2. Peter von der Lippe & W.Erwin Diewert, 2010. "Notes on Unit Value Index Bias," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(6), pages 690-708, December.
  3. Michael Reiter, 1999. "Asset prices and the measurement of wealth and saving," Economics Working Papers 396, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Gian Maria Tomat, 2002. "Durable goods, price indexes and quality change: an application to automobile prices in Italy, 1988-1998," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 439, Bank of Italy, Economic Research and International Relations Area.
  5. Christos Ioannidis & Mick Silver, 2003. "Chained, exact and superlative hedonic price changes: estimates from microdata," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 35(9), pages 1005-1014.
  6. Iturra, Victor & Paredes - Araya, Dusan, 2011. "Construction of a Spatial Housing Price Index by Estimating an Almost Ideal Demand System," MPRA Paper 30581, University Library of Munich, Germany.
  7. Gordon, Robert-J, 1999. "The Boskin Commission Report and Its Aftermath," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 41-68, December.
  8. Ivancic, Lorraine & Erwin Diewert, W. & Fox, Kevin J., 2011. "Scanner data, time aggregation and the construction of price indexes," Journal of Econometrics, Elsevier, Elsevier, vol. 161(1), pages 24-35, March.
  9. W. Erwin Diewert, 1995. "Price and Volume Measures in the System of National Accounts," NBER Working Papers 5103, National Bureau of Economic Research, Inc.
  10. Scott Roger, 1997. "A robust measure of core inflation in New Zealand, 1949-96," Reserve Bank of New Zealand Discussion Paper Series G97/7, Reserve Bank of New Zealand.
  11. Robert J. Gordon, 2000. "The Boskin Commission Report and its Aftermath," NBER Working Papers 7759, National Bureau of Economic Research, Inc.
  12. Diewert, Erwin, 2007. "Index Numbers," Economics working papers, Vancouver School of Economics diewert-07-01-03-08-17-23, Vancouver School of Economics, revised 31 Jan 2007.
  13. de Haan, Jan & van der Grient, Heymerik A., 2011. "Eliminating chain drift in price indexes based on scanner data," Journal of Econometrics, Elsevier, Elsevier, vol. 161(1), pages 36-46, March.
  14. Gurdgiev, Constantin T., 2006. "Owner-occupied housing in a model of exchange rate determination," Journal of Housing Economics, Elsevier, Elsevier, vol. 15(3), pages 217-229, September.
  15. Jack E. Triplett, 2003. "Using Scanner Data in Consumer Price Indexes. Some Neglected Conceptual Considerations," NBER Chapters, in: Scanner Data and Price Indexes, pages 151-162 National Bureau of Economic Research, Inc.
  16. W. Erwin Diewert, 1998. "Index Number Issues in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 47-58, Winter.
  17. Hill, Robert J., 2006. "Superlative index numbers: not all of them are super," Journal of Econometrics, Elsevier, Elsevier, vol. 130(1), pages 25-43, January.
  18. Richard G. Anderson & Jason Buol, 2005. "Revisions to user costs for the Federal Reserve Bank of St. Louis monetary services indices," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 735-50.
  19. Ana Aizcorbe & Nicole Nestoriak, 2010. "Price Indexes for Drugs: A Review of the Issues," BEA Working Papers, Bureau of Economic Analysis 0050, Bureau of Economic Analysis.
  20. W. Erwin Diewert, 2003. "Hedonic Regressions. A Consumer Theory Approach," NBER Chapters, in: Scanner Data and Price Indexes, pages 317-348 National Bureau of Economic Research, Inc.

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