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The true index of cost of living under general equilibrium: The numéraire matters

Ana-Isabel Guerra, Antonio Manresa and Ferran Sancho

Economics Letters, 2018, vol. 173, issue C, 69-72

Abstract: The evaluation of welfare effects should be unambiguous. We show that the Konüs true index of cost of living is numéraire dependent in general equilibrium. This may lead to ambiguous, even contradictory, interpretations of welfare results. To correct this problematic interpretational situation, we propose a normalization of the standard Konüs index using an endogenously determined price index. We also provide a simplified expression of the index for the special case of homothetic utilities, which is especially relevant given their widespread use in numerical general equilibrium.

Keywords: Konüs index; True cost of living; Welfare effects; General equilibrium (search for similar items in EconPapers)
JEL-codes: D12 D58 D60 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:ecolet:v:173:y:2018:i:c:p:69-72