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Chapter 8 Cost of Living Indexes and Exact Index Numbers

In: Quantifying Consumer Preferences

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  • W. Erwin Diewert

Abstract

The chapter reviews and extends the theory of exact and superlative index numbers. Exact index numbers are empirical index number formula that are equal to an underlying theoretical index, provided that the consumer has preferences that can be represented by certain functional forms. These exact indexes can be used to measure changes in a consumer's cost of living or welfare. Two cases are considered: the case of homothetic preferences and the case of nonhomothetic preferences. In the homothetic case, exact index numbers are obtained for square root quadratic preferences, quadratic mean of order r preferences, and normalized quadratic preferences. In the nonhomothetic case, exact indexes are obtained for various translog preferences.

Suggested Citation

  • W. Erwin Diewert, 2009. "Chapter 8 Cost of Living Indexes and Exact Index Numbers," Contributions to Economic Analysis, in: Quantifying Consumer Preferences, pages 207-245, Emerald Group Publishing Limited.
  • Handle: RePEc:eme:ceazzz:s0573-8555(2009)0000288011
    DOI: 10.1108/S0573-8555(2009)0000288011
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    Cited by:

    1. Cardullo, Gabriele & Sechi, Agnese, 2023. "Local Labor Markets with Non-homothetic Preferences," IZA Discussion Papers 16533, Institute of Labor Economics (IZA).

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