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Problems of operationalizing the concept of a cost-of-living index


  • Breuer, Claus C.
  • von der Lippe, Peter


The aim of our paper is to discuss the problems of operationalizing the concept of a .cost-of-living-index. (COLI). For this purpose we are first undertaking a theoretical analysis of Diewert’s theory of superlative index numbers as one possible approach to approximate a COLI. We show that Diewert.s superlative index approach is arguable in many points and that the approach requires restrictive assumptions which are not likely to be met in observed households behaviour. To get a better idea about the deviation of observed households behaviour from the neoclassical assumptions about utility maximizing behaviour, we are estimating an Almost Ideal Demand System and a Quadratic Almost Ideal Demand System with cross section micro data from the German income and expenditure survey. Using the results of the demand system estimations we calculate COLIs and compare them with superlative index numbers and the Laspeyres price index.

Suggested Citation

  • Breuer, Claus C. & von der Lippe, Peter, 2011. "Problems of operationalizing the concept of a cost-of-living index," MPRA Paper 32902, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:32902

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    References listed on IDEAS

    1. Mitra, Tapan & Ok, Efe A., 1997. "On the Equitability of Progressive Taxation," Journal of Economic Theory, Elsevier, vol. 73(2), pages 316-334, April.
    2. Young, H Peyton, 1990. "Progressive Taxation and Equal Sacrifice," American Economic Review, American Economic Association, vol. 80(1), pages 253-266, March.
    3. Smith, Adam, 1776. "An Inquiry into the Nature and Causes of the Wealth of Nations," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number smith1776.
    4. Keen, Michael & Papapanagos, Harry & Shorrocks, Anthony, 2000. "Tax Reform and Progressivity," Economic Journal, Royal Economic Society, vol. 110(460), pages 50-68, January.
    5. Vito Tanzi, 2010. "Tax Systems in the OECD: Recent Evolution, Competition and Convergence," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1012, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    6. Moyes, Patrick, 2003. "Redistributive effects of minimal equal sacrifice taxation," Journal of Economic Theory, Elsevier, vol. 108(1), pages 111-140, January.
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    More about this item


    cost-of-living index; superlative index numbers; Diewert; demand systems;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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