Substitution Bias in the Measurement of Import and Export Price Indices: Causes and Correction

Ludwig von Auer and Alena Shumskikh

No 2020-10, Research Papers in Economics from University of Trier, Department of Economics

Abstract: The import and export price indices of an economy are usually compiled by some Laspeyres type index. It is well known that such an index formula is prone to substitution bias. Therefore, also the terms of trade (ratio of export and import price index) are likely to be distorted. The underlying substitution bias accumulates over time. The present paper introduces a simple and transparent retrospective correction approach that removes the substitution bias and produces meaningful long-run time series of import and export price levels and, therefore, of the terms of trade. Furthermore, an empirical case study is conducted that demonstrates the efficacy and versatility of the correction approach.

Keywords: distortion; official statistics; terms of trade; time series (search for similar items in EconPapers)
Pages: 23 pages
Date: 2020
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:trr:wpaper:202010

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