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The substitution bias of the consumer price index

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    Abstract

    The paper uses elementary consumer theory to propose an inflation independent ratio definition of the substitution bias of the Laspeyres consumer price index, and derives an approximate substitution bias which depends on the size of the price change as measured by a norm in the Laspeyres plane and on the elasticity of substitution in the direction of the price change. This norm or distance measure can be interpreted as a price substitution index which yields useful information about the movements of relative prices. Norwegian CPI data are used to quantify these relationships.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp451.pdf
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    Bibliographic Info

    Paper provided by Research Department of Statistics Norway in its series Discussion Papers with number 451.

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    Date of creation: Mar 2006
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    Handle: RePEc:ssb:dispap:451

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    Keywords: consumer price index (CPI); substitution bias; elasticity of substitution.;

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    1. Tran, Van Hoa, 1969. "Additive Preferences and Cost of Living Indexes: An Empirical Study of the Australian Consumer's Welfare," The Economic Record, The Economic Society of Australia, vol. 45(111), pages 432-40, September.
    2. Lloyd, P J, 1975. "Substitution Effects and Biases in Nontrue Price Indices," American Economic Review, American Economic Association, vol. 65(3), pages 301-13, June.
    3. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, April.
    4. Matthew D. Shapiro & David W. Wilcox, 1997. "Alternative strategies for aggregating prices in the CPI," Review, Federal Reserve Bank of St. Louis, issue May, pages 113-125.
    5. Goldberger, Arthur S. & Gamaletsos, Theodore, 1970. "A cross-country comparison of consumer expenditure patterns," European Economic Review, Elsevier, vol. 1(3), pages 357-400.
    6. W. Erwin Diewert, 1998. "Index Number Issues in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 47-58, Winter.
    7. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    8. E. T. McPHEE., 1928. "Notes," The Economic Record, The Economic Society of Australia, vol. 4(1), pages 92-95, 05.
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