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Decomposing the Price Effect on the Cost of Living for Australian Households

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Abstract

In this paper the author demonstrates that the change in cost of living index (CLI) can be decomposed into the contribution that the price change in each good makes to the CLI. A CLI is constructed based upon a demographically scaled version of the Quadratic Almost Ideal demand system. The construction of a CLI in demographic rank-3 framework allows the index to vary across demographics and expenditure level. The parameters of the CLI are recovered by estimating the demand system based upon a pooled cross-section of the Household Expenditure Surveys (HES) and Consumer Price Index (CPI) series from the Australian Bureau of Statistics (ABS) over 1984 to 2003-04. The contribution of price changes in thirteen broad commodity aggregates from 1984 to 2003-04 on the CLI are examined. The variation of the impact is examined across levels of expenditure and the number of children in the household.

Suggested Citation

  • Blacklow, Paul, 2009. "Decomposing the Price Effect on the Cost of Living for Australian Households," Working Papers 10452, University of Tasmania, Tasmanian School of Business and Economics, revised 01 May 2009.
    • Handle: RePEc:tas:wpaper:10452
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    File URL: http://eprints.utas.edu.au/10452/1/DP2010-08_BLACKLOW-_Price_Effects_on_Australian_Households.pdf
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    References listed on IDEAS

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    1. Pollak, Robert A., 1989. "The Theory of the Cost-of-Living Index," OUP Catalogue, Oxford University Press, number 9780195058703.
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    3. Jorgenson, Dale W & Slesnick, Daniel T, 1987. "Aggregate Consumer Behavior and Household Equivalence Scales," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(2), pages 219-232, April.
    4. Geoffrey Lancaster & Ranjan Ray, 1998. "Comparison of Alternative Models of Household Equivalence Scales: The Australian Evidence on Unit Record Data," The Economic Record, The Economic Society of Australia, vol. 74(224), pages 1-14, March.
    5. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
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    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D6 - Microeconomics - - Welfare Economics
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty

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