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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes Glossary Words in boldface italic appear separately in the glossary. Aggregation The process whereby prices of individual goods are combined to produce price (or cost-of-living) indexes. For the Consumer Price Index (CPI), some 80,000 price quotes are collected each month from 87 urban areas (primary sampling units) throughout the United States. See lower-level aggregation, up per-level aggregation. Base period The period in which the market basket of goods and services and the expenditure shares for those goods and services are set. See Laspeyres index, reference period. Boskin commission The Advisory Committee to Study the Consumer Price Index, formed in 1995 by the Senate Finance Committee and chaired by Michael Boskin of Stanford University. Chained index A multiperiod index that links indexes for shorter periods that may have different item expenditure weights. Class-mean method One of the methods used during CPI item replacement. Like deletion, the method involves imputing the price of a changed item, but it does so from a set of similar goods further limited to those that are (1) classified
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes as comparable replacements or (2) that could be explicitly quality adjusted by a hedonic or direct cost method. Commodities and Services (C&S) Survey A longitudinal survey in which field agents of the Bureau of Labor Statistics (BLS) collect price quotes from sample outlets for items currently included in the CPI. Commodity analyst A member of BLS’s CPI team who determines the comparability of disappearing and replacement items that arise in the CPI sample. Comparison period The second (often the current) period in the price or cost-of-living comparison. Conditional cost-of-living index (CCOLI) The minimal expenditure ratio needed to maintain a given standard of living in the face of changes in the prices of private goods and services, on the assumption that “outside conditions”—the status of the social and physical environment and the provision of goods by the government—remain unchanged. Consumer demand function A construct that indicates the relationship between prices and income on one hand and, on the other, the quantity of a good demanded. Consumer Expenditure Study (CEX) An annual survey, designed to produce household-level data on both income and consumption, from which the BLS establishes item category (upper-level) expenditure weights. Consumer substitution The purchase by consumers of more of one good (that has become relatively cheaper) and less of another (that has become relatively more expensive) in response to a relative price change. See lower-level substitu tion, upper-level substitution. Cost-of-goods index (COGI) An index in which a fixed basket of goods is priced each period, calculated as the cost of the basket in the comparison period divided by the cost of the basket in the reference period. Cost-of-living index (COLI) An index based on the minimal expenditure ratio needed to maintain a given standard of living (however determined) in the com parison period and the reference period. CPI The Consumer Price Index, a modified Laspeyres index which tracks the price of 218 categories of goods across 87 primary sampling units in urban areas of the United States.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes CPI-E An experimental version of the CPI in which upper-level weights are based on a subset of the CEX sample aged 62 and over. CPI Housing Survey A survey conducted by the BLS to track changes in the contract rents (a major component of the shelter item category) paid by a sample of renters. CPI-U The CPI series that is weighted by the full CEX urban sample. It is the most frequently used version of the CPI. CPI-U-RS The CPI research series that recalculates the CPI-U from 1978 forward with methods currently used to produce the CPI. CPI-W A version of the CPI in which upper-level weights are based on a subset of the CEX sample that are wage earners. Deletion method One of the methods used in CPI item replacement when the replacement and replaced items are judged noncomparable and when neither overlapped prices nor producer cost information is available. During the item transition period, change in the index component is proxied by the observed price change of other goods in the same CPI item stratum. Direct comparison In item replacement, a method that is applied when the replaced and replacement items are determined to be comparable by the commodity analyst. Direct hedonic method A hedonic quality adjustment technique that produces a price index for a good directly from hedonic regression coefficients. Democratic index An index in which each household’s index is given equal weight. Entry-level item (ELI) A finely specified item within an item strata (e.g., oranges is an ELI in the citrus fruit strata). Expenditure weight The portion of consumer expenditures assigned to a specific good or service category. Explicit cost-based adjustment An item replacement method used when information about production cost differences between the replaced item and the new item is available under which the per-unit change in production cost, as reported
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes by manufacturers, is subtracted from the change in the observed price paid by consumers. Fisher ideal index A superlative index derived as the geometric mean (the square root of the product) of the Paasche index and the Laspeyres index. Fixed-weight index An index constructed as the ratio of the cost of purchasing a basket of goods and services at the prices of one period (or in one location) to the cost of purchasing that same basket at the prices of a subsequent period (or different location). The set of weights assigned to the prices of items in the basket remains the same in each period (or location). Geometric mean formula A method for combining price quotes, currently used in the CPI for about 61 percent (by weight) of basic item indexes, that uses a set of fixed-expenditure (as opposed to quantity) proportions as weights for averaging individual prices within a basic index. Fixing relative expenditure proportions implies that customers substitute among specific items (in response to changing prices) in such a way that the share of expenditure on each item category remains constant. Hedonic quality adjustment A method that uses regression technique to separate out the effect of changed item quality on its observed price by establishing a relationship between a good’s characteristics and its price. See direct hedonic method, indirect hedonic method. Homothetic preferences A theoretical assumption positing that a consumer ranks different bundles of goods the same no matter what her level of living so that the rate at which a person is prepared to trade one good for another is independent of whether the person is rich or poor; it also implies that, as people become better off, they simply scale up their purchases without changing the pattern of consumption. Index (chain) drift The divergence between a chained index and a fixed-weight index caused by the linking of indexes with different strata weights. Index formula A formula that dictates the exact way in which prices and expenditure shares are combined to calculate a price index. Indirect hedonic method In hedonic quality adjustment, a technique that involves adjusting, post hoc, the observed price difference between an outgoing item and a replacement item based on the portion of the price change attributable to a changed characteristic. The magnitude of the adjustment is determined by
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes the hedonic function and the differences between the characteristics bundles supplied by the old and new items. Item replacement The selection by a BLS field agent of a new (previously not priced) item because the item previously priced is no longer available at a particular CPI sample outlet. BLS has implemented a set of methods designed for judging pure price change when prices of two non-identical items must be compared. See class-mean method, deletion method, direct comparison, explicit cost-based adjustment, overlap pricing. Item strata The 218 categories of goods and services that represent the lowest level of disaggregation at which CPI subindexes are calculated. Item weighting (upper level) The expenditure share assigned to each category of goods and services in an index. Laspeyres index A price index measured as a weighted average of the ratios of individual prices in two periods. Item weights are fixed to reflect expenditure shares in the base period (which for a Laspeyres is the same as the reference period). The denominator is the priced-out fixed bundle established in the base period; the numerator is the same bundle, priced out for a later period. Link period The period in which new item weights are introduced in an index. Lower-level aggregation The manner in which individual price quotes are combined by area (or area groups) into separate indexes for some 218 categories of goods, called item strata, the basic building blocks for the CPI. Lower-level substitution A change in the proportions of expenditure on goods within a CPI entry-level item category (e.g., Gala apples for Golden Delicious). See consumer substitution. Medical Care Price Index (MCPI) An index designated in scope to track changes in the price of (or cost of living associated with) goods and services related to households’ medical care. Modified Laspeyres index As used for the CPI, an index in which the fixed bundle (strata weights) is established in a base period that does not typically coincide with the reference period. Information from three (not two) periods enters index calculation. Outlet rotation The process whereby BLS reselects the outlets from which it prices index items.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes Outlet substitution The phenomenon in which consumers switch outlet patronage for price or cost-of-living reasons; typically used to describe situations in which consumers switch from purchasing a good at a high-price seller to a lower-priced competitor. Overlap pricing In item replacement a method that can be used when both old and new models are available in at least one period. Paasche index A price index that weights expenditure shares by the comparison period (typically the most current) consumption patterns. It measures the percentage difference in expenditures between what it would cost the household to buy the comparison period quantities at the old prices and what it costs at the new ones. Personal consumption expenditure (PCE) data A measure of consumer expenditure shares, produced by the Bureau of Economic Analysis (BEA), based on aggregate sales data. Personal consumption expenditure (PCE) deflator A chain price index (that uses a Fisher ideal index) for personal consumption expenditures based (mainly) on CPI-collected prices and PCE weights. Plutocratic index A price index in which all dollars of expenditure (or income) are treated equally so that, implicitly, each household is weighted proportional to its expenditures. Point of Purchase Survey (POPS) A survey of households, conducted by the Census Bureau, used in the CPI to determine the distribution of households’ expenditures across specific outlets. Private good A good or service sold in markets, whose benefits can be limited to those who pay for it. PSU One of the 87 primary sampling units that are the geographic delineations from which prices are surveyed. Public good A good that (1) is available to all if it is available to one and (2) whose consumption by one person does not reduce the amount available to others. Reference period The first period in a price or cost-of-living comparison.
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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes Standard of living Narrowly defined (entirely in terms of consumption of goods and services), a measure of the extent to which preferences are satisfied which, given a set of prices that remain constant over a number of periods, can be measured by the amount of money spent. More generally, a measure that also captures broader aspects of well-being, such as health or happiness. Stigler committee The Price Statistics Review Committee of the National Bureau of Economic Research, chaired by George Stigler. Superlative index A price index that weights expenditure patterns from both the current (comparison period) and past (base or reference period) in the price ratio calculation. Tornqvist index A superlative index in which the rate of growth of individual prices is weighted by their share in the budget averaged over the base period and the current period. Upper-level aggregation The process whereby area/item strata indexes are combined to form the national CPI. Upper-level substitution A change in the proportions of expenditure on goods between item categories (e.g., chicken for beef). See consumer substitution. Utility The satisfaction derived from the consumption of goods or services. Virtual price The price of a new good that would have been just high enough, during a period prior to its appearance in the market, to drive quantity demand to zero.
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