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

  • Balk Bert M.

    ()

    (Rotterdam School of Management, Erasmus University, P. O. Box 17 38, 3000 DR Rotterdam, Netherlands, and Statistics Netherlands, The Hague)

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    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 CPI Manual (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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    Article provided by De Gruyter in its journal Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik).

    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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    1. 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.
    2. 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.
    3. 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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