Economic Approach

Naohito Abe ()
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Naohito Abe: Hitotsubashi University

Chapter Chapter 5 in Price Index Numbers, 2025, pp 111-128 from Springer

Abstract: Abstract This chapter explores the economic approach to index numbers, specifically focusing on the cost-of-the living (COLI). This approach conceptualizes price indices based on utility levels and prices, differentiating from axiomatic and stochastic approaches which rely purely on price and quantity data. The chapter discusses the theoretical basis of the COLI, which measures the expenditure required to maintain a constant level of utility over time. It investigates the assumptions underlying the COLI, such as homothetic preferences, and the mathematical simplicity of computing the index through expenditure functions. However, it also addresses the practical challenges and limitations of applying COLI, especially the difficulty in estimating necessary economic parameters and adapting the model to real-world data where consumer preferences and conditions vary. The discussion highlights the need for robust economic models to accurately reflect consumer behaviours emphasizing the gap between theoretical ideal and practical application.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-981-97-6305-4_5

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DOI: 10.1007/978-981-97-6305-4_5

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