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An Exact Index for the CES Function with Unobservable Prices

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  • Daehoon Nahm

Abstract

Introduction of new products into the market place poses a difficult problem for the calculation of a cost-of-living (COL) index. The problem is that the reservation prices of new products in the periods before their introduction are unobservable. This paper introduces a new index number formula that overcomes the problem. It is exact for the constant-elasticity-of-substitution (CES) function. Unlike the one introduced to the literature by Feenstra (1994), for which the elasticity of substitution has to be estimated using a separate econometric model, the new index can be computed by simply substituting available prices and quantities into a known exact functional form. The new index number formula is illustrated with the data used in Feenstra (1994). Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Daehoon Nahm, 2004. "An Exact Index for the CES Function with Unobservable Prices," Journal of Productivity Analysis, Springer, vol. 21(3), pages 317-336, May.
    • Handle: RePEc:kap:jproda:v:21:y:2004:i:3:p:317-336
    DOI: 10.1023/B:PROD.0000022096.70026.bd
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    References listed on IDEAS

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    1. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    2. Lloyd, P J, 1975. "Substitution Effects and Biases in Nontrue Price Indices," American Economic Review, American Economic Association, vol. 65(3), pages 301-313, June.
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