An Exact Index for the CES Function with Unobservable Prices

Daehoon Nahm ()

Journal of Productivity Analysis, 2004, vol. 21, issue 3, 317-336

Abstract: Introduction of new products into the market place poses a difficult problem for the calculation of a cost-of-living (COL) index. The problem is that the reservation prices of new products in the periods before their introduction are unobservable. This paper introduces a new index number formula that overcomes the problem. It is exact for the constant-elasticity-of-substitution (CES) function. Unlike the one introduced to the literature by Feenstra (1994), for which the elasticity of substitution has to be estimated using a separate econometric model, the new index can be computed by simply substituting available prices and quantities into a known exact functional form. The new index number formula is illustrated with the data used in Feenstra (1994). Copyright Kluwer Academic Publishers 2004

Keywords: cost of living index; reservation price; exact index; CES function (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1023/B:PROD.0000022096.70026.bd

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