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Measuring the true index of cost of living under general equilibrium

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  • Ana-Isabel Guerra
  • Ferran Sancho

  • Antonio Manresa

Abstract

We show that the index of cost of living introduced by Konüs (1939) is numéraire dependent in a general equilibrium setting. This dependency gives rise to ambiguity situations for the interpretation of the index. To correct for this ambiguity we show that we need to neutralize the standard Konüs index using a price index. This correction eliminates the interpretational problem due to, and inherited from, the selection of the numéraire. We also provide a simplified expression of the index for the case of homothetic utilities. Two numerical examples show the discrepancies between the literal estimates, as they would be used under partial equilibrium, and the neutralized version. The discrepancies would give rise to erroneous assessments in the evaluation of the welfare effects resulting from the adoption of new policies.

Suggested Citation

  • Ana-Isabel Guerra & Ferran Sancho & Antonio Manresa, 2017. "Measuring the true index of cost of living under general equilibrium," UFAE and IAE Working Papers 962.17, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    • Handle: RePEc:aub:autbar:962.17
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    References listed on IDEAS

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    1. Ana-Isabel Guerra & Ferran Sancho, 2017. "Compensating the Compensating Variation," UFAE and IAE Working Papers 961.17, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    2. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-1051, September.
    3. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
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    Keywords

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    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D60 - Microeconomics - - Welfare Economics - - - General

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