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

Author

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

Abstract

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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    File URL: https://mpra.ub.uni-muenchen.de/32902/1/MPRA_paper_32902.pdf
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    Cited by:

    1. repec:oup:wbecrv:v:31:y:2017:i:2:p:504-530. is not listed on IDEAS
    2. John Gibson & Trinh Le & Bonggeun Kim, 2017. "Prices, Engel Curves, and Time-Space Deflation: Impacts on Poverty and Inequality in Vietnam," World Bank Economic Review, World Bank Group, vol. 31(2), pages 504-530.

    More about this item

    Keywords

    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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