Measuring the true index of cost of living under general equilibrium

Ana-Isabel Guerra, Ferran Sancho and Antonio Manresa ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: We show that the index of cost of living introduced by Konüs (1939) is numéraire dependent in a general equilibrium setting. This dependency gives rise to ambiguity situations for the interpretation of the index. To correct for this ambiguity we show that we need to neutralize the standard Konüs index using a price index. This correction eliminates the interpretational problem due to, and inherited from, the selection of the numéraire. We also provide a simplified expression of the index for the case of homothetic utilities. Two numerical examples show the discrepancies between the literal estimates, as they would be used under partial equilibrium, and the neutralized version. The discrepancies would give rise to erroneous assessments in the evaluation of the welfare effects resulting from the adoption of new policies.

Keywords: Konüs index; true cost of living; general equilibrium; welfare effects. (search for similar items in EconPapers)
JEL-codes: D12 D58 D60 (search for similar items in EconPapers)
Pages: 11
Date: 2017-06-13
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:962.17

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