resolution depends in part on whether one evaluates them through the prism of a fixed-weight or a cost-of-living viewpoint and on how the cost-of-living approach is interpreted: How aggressively and comprehensively should the BLS pursue efforts to use econometric techniques to adjust observed prices for the effect of quality improvements? How comprehensive should be the universe of goods covered by the CPI—should it cover private goods only or also encompass public goods? Should the BLS take into account, to the extent measurement is feasible, the effects on living standards—and therefore on living costs—of changes in pollution, crime rates, congestion, and other “environmental” developments? How should the index take account of the effect on living standards of the continual introduction of new goods in our technologically innovative society? And, in either a fixed-weight or a cost-of-living index, how should the experiences of the rich and the poor, the old and the young, be combined into a single index, and should indexes for population subgroups also be published?

The difference between the two approaches to index construction is not fully captured by juxtaposing the terms “fixed-weight index” and “cost-of-living index.” The objectives of the two indexes are not the same. The former seeks to measure the effects of price changes on the cost to a household of purchasing a specified basket of goods and services. The latter seeks to measure the effects in terms of the cost of maintaining the household’s standard of living at some specified level. The two effects are not usually the same. And, in a world in which consumer tastes change and the qualities of many goods and services are constantly being altered, measuring either type of index is a difficult task. A more appropriate terminology would contrast a “cost-of-goods index” (COGI, where “goods” includes both goods and services) with a “cost-of-living index.”3 Considered from the standpoint of an individual household, a COGI seeks to provide a measure of the percentage change in expenditures the household would require to purchase a basket of goods, given a change in prices between some initial period (usually called the reference period) and some later (comparison) period.4 As its name implies, it seeks to measure changes in the cost of goods. In principle, for a COGI, specification of the basket of goods may be based on a past period’s consumption patterns or current patterns, or even a point in between. A COLI, as noted above, seeks to measure the percentage change in expenditures needed to maintain a household’s standard of living at some specified level (typically, but not necessarily, the level it had in the reference period). As its name implies, its objective is to measure changes in the cost of living.

3  

Unless otherwise specified, “goods” refers to both goods and services throughout the report.

4  

Technically, the index measures the ratio of the expenditures needed in the current period to purchase the same basket of goods as in the base period; the percentage change is simply that ratio minus 1.0 (times 100).



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