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



v = pq = c(pt,ut)

(9)


°t    Poqo    c(po,∙⅝)

assuming utility maximisation in both periods and using the homothetic-
ity assumption

utc (Pt) _ f (qt)   c(pt)

(10)


-------:----- —  :----- , —:----- .
UoC (Po)    f (qo)  c(po)

where the term (the ratio of utility levels) is said to be the “economic
quantity index”, while the second factor is called “economic price index” or
simply COLI.

In his theory of superlative indices Diewert studied in particular only two
functional forms for
f (q) and (derived therefrom) the cost function (we quote
the latter only), viz.

1. the quadratic mean of order r utility and cost function

cr (P) =


(∑∑ ' priwf


(p'Bp)1/r


(11)


where p = pr±2 ...pN


the coefficient bij of B = B/ in the quadratic form

p/Bp have to meet certain restrictions, and

2. the normalised quadratic cost function ([HJDiewert (2009), pp. 18 -
23)

ɪ p/Ap

(12)


cNQ (p) = p/b + 2---

ɑ/p

where the scalar а/p performs a sort of normalisation and again coeffi-
cients a and b are appropriately restricted. Both models are fairly general.
The first nests the

“homogeneous quadratic” function (r = 2) for which Fisher’s ideal
index is exact,

the (homogeneous) translog function (r 0)

In co (p) = βo + βi In pi + 2 ΣΣβij In pi In pj       (13)

i                         i j

for which the Tbrnqvist index is exact,

14



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