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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Suggested Citation:"Index." National Research Council. 2002. At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes. Washington, DC: The National Academies Press. doi: 10.17226/10131.
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Index A mathematical approach, 77-79 in MCPI, 182, 188 ACNielsen, 266, 270-271 national indexes, 4, 25, 26, 46, 87, 214, Aggregation. See also Subgroup indexes 219-221 across consumers, 26-27 plutocratic indexes, 4, 5, 26-27, 45, 77-79, across households, 4, 45, 79, 223-226, 230- 86, 235 n.9 231, 240-246 population average of budget shares, 79 for COGIs, 43, 77-79 quality change adjustments and, 125 n.18 for COLIs, 4, 15, 51-52, 53, 61-62, 85-86, recommendations, 240-241 242 representative consumer concept, 241-246 conceptual issues, 39, 51-52 strata indexes, 235 n.9 in CPI, 15, 23-24, 243-244, 305, 308, 311 substitution effects and, 24-25, 26, 52 data collection issues, 27 in superlative indexes, 52, 53, 215 defined, 305 upper-level, 24, 199, 311 demand, 243, 244 user costs and, 34, 72 democratic indexes, 4, 5, 26-27, 45, 77-79, in wage indexes, 200-201 86, 235 n.9 American Housing Survey, 11, 36, 147 expenditure-weighted averaging, 26, 52, 60 Apparel, 29, 67, 72, 117, 118, 120 nn.11&12, geometric means formula, 5, 23, 24, 39, 50, 124, 130, 142, 147, 227 60, 77, 127, 210, 215 n.24, 279-280, Appliances and electronics, 6-7, 72, 114, 131, 308 138, 141, 147, 148, 163 n.12, 233 n.7. heterogeneity issue, 4, 26, 125 n.18, 223- See also individual items 226, 229, 240-241 Area strata, 311 of individual price indexes, 44-45, 215, 235 Automobiles, 28-29, 33, 35, 72, 107, 109, 110, n.9 111, 119, 121, 124, 142, 147-148, 227, lower-level, 23, 61-62, 309 233 n.7 319

320 INDEX B Census Bureau, 255, 310 Centers for Medical and Medicaid Services, 10, Base period, 41, 42, 69, 305, 309, 311 189, 190 Basket price index. See Cost-of-goods index Chain drift, 167, 257, 308 Bias Chained index, 162, 167, 210, 253 n.2, 277, in CEX, 253, 254-255 305, 308, 310 duration neglect, 54 Choke price. See Virtual price in hedonic quality adjustment methods, 128, Class-mean method, 117, 118, 119, 121, 134 129, 133, 139, 140, 249 n.30, 136-137, 139, 305-306 in inflation indexes, 217-218 Climate change, 20 in item replacement methods, 112-114, 121- Commodities and Services (C&S) Survey, 11, 122, 136 36, 37, 263, 281-282, 306 MCPI, 148, 185-186, 188 Commodity analysts (BLS), 107, 116, 118, new goods, 31, 32, 107-108, 112-121, 146- 125, 134, 138-139, 306 148, 156-158, 160-161, 162, 273 Comparison situation outlet, 8, 33, 128, 168 n.16, 170, 172, 173- conceptual issues, 41, 42, 48-49, 51 174 period-based, 41, 306, 310, 311 point-of-introduction, 158-159, 160-161 place-based, 66-67, 69-70 reporting, 254-255 Compensating variation, 48, 81, 153 sample selection, 128, 156-157 Compensation issues seasonal, 234 child support, 209 substitution, 8, 33, 59-62, 93, 113, 128, COGI and, 70, 71 147, 168 n.16, 170, 172, 173-174, 248 COLI and, 48, 51, 58, 61, 70-71, 81 n.18 conceptual bases for indexes, 48, 51, 58, 61, within-sample, 140 70-71, 81 Boskin commission, 38, 39 domain considerations, 21, 70, 103-105 on conceptual basis for CPI, 3, 14, 41, 73 employer-paid benefits, 21, 98, 103-105 criticisms of CPI, 1, 14, 27, 62 homeowners, 70-71, 72 defined, 305 MCPI components and, 186 on domain of CPI, 66, 96 social security recipients, 40, 43, 48 new goods bias estimates, 32, 157, 162, 163 and standard of living, 48 outlet substitution bias estimates, 173-174 superlative indexes, 60, 61, 191 quality adjustment bias estimates, 27, 108, Computers, 29, 109, 110, 117, 120 n.12, 124, 109 n.2, 112-114, 115, 116-117, 119, 127, 129, 130, 134, 135, 140, 142, 147, 121, 131, 139, 146-148 156, 166 on subgroup indexes, 228, 229, 250 Conceptual bases for indexes on theoretical validity of CPI, 109 n.2 aggregation of prices, 39, 51-52 Bureau of Economic Analysis (BEA), 4, 102, availability of data and, 15, 42-43, 50 105, 189, 210, 214, 253, 274, 310 basket price (cost-of-goods) approach, 2-3, Bureau of Labor Statistics, 306 14, 16, 18-19, 38-39, 41, 42-46, 47, 48- charge to committee, 17 49, 50, 57, 74-79, 94 commodity analysts, 107, 306 COGI vs. COLI, 57-72 quality adjustment approaches, 39, 73, 107- comparison situation, 41, 42, 48-49, 51 108, 113 n.6, 114-122, 129-140 compensation issues, 48, 51, 58, 61, 70-71, ScanData initiative, 266-267, 269 81 consumer demand functions, 49-50 cost-of-living approach, 2-3, 14, 15, 16, 18- C 19, 38-39, 41, 43, 46-53, 57, 58, 65-68, Capital gains and losses, 72 69, 79-93, 283-292 Cellular phones, 8, 31, 32, 107, 124-125, 140, CPI, 1, 2-3, 8, 14, 18-19, 38, 39, 41, 42, 73 criticisms of, 40, 52-53 148, 156, 161, 165

INDEX 321 design considerations, 11, 40, 42, 43, 97, scanner technology and, 271-272 191-192 subgroup data, 4, 203 n.11, 227, 234, 236, domain-related, 3, 65-68, 94, 96-98 247, 248, 255, 259 homotheticity in preferences, 49, 50-51 substitution with new goods, 164-165 income changes, 2, 90 uses, 252, 261, 277, 281 mathematical approach, 74-93 Consumer Price Index (CPI) MCPI, 181-185 aggregation in, 15, 23-24, 243-244, 305, public perceptions and understanding of, 308, 311 39, 58-59 biases in, 112-122, 129, 250 purpose of index and, 40, 42, 43 COLI-based, 2-3, 4, 14, 15, 18-19, 24, 94, quality adjustment, 2, 3, 14, 19, 28, 30, 39, 104, 110 n.3, 112, 144-145, 272-273 40, 57, 59, 62-64, 97-98, 106 comparison period, 42 reference period, 41, 42, 47-49, 51 conceptual basis, 1-2, 8, 15-16, 18-19, 38, satisfaction, 47, 53, 55-57 39, 41, 42, 73, 94, 221 stochastic approach, 41-42, 68 criticisms of, 1, 13, 14, 27, 39 stocks and flows, 33-35, 71-72 defined, 306 subpopulations and, 229-232 domain, 3-4, 16, 17, 19-21, 73, 94, 105 substitution effect, 2, 3, 39, 47-48, 50-51, experimental version (CPI-E), 11, 197, 203 52-53, 58, 59-62 n.11, 228, 246-250, 307 superlative indexes, 50-51, 53, 83-85 fixed-weight method, 14-15 taste changes, 2, 53, 59, 64, 67, 69-70 growth of, 207-208 test approach, 41-42, 50, 68 hedonic quality adjustment, 6-7, 132-137, theoretical, 39, 40, 43-58, 73, 74-93 138, 139-140, 141 utility and choice, 47, 53-55 Housing Survey, 307 virtual demand for new commodities, 158 improvement initiative, 131 n.25, 145, 164, n.6 166 n.14 Conditional cost-of-living index (CCOLI), 39, introduction of new goods, 157, 161-167 65-68, 69, 70, 86-90, 306 item replacement, 134, 305-306, 307-308 Congressional Budget Office, 259 item strata, 23, 130, 131, 156, 163, 307, 309 Conrad, Kent, 228 modified Laspeyres-based, 24, 49, 52, 61, Constant-elasticity-of-substitution (CES) price 62, 97 n.2, 104, 111, 114, 221, 276-277, index, 6, 60-61, 91-93, 194 306, 309 Constant utility index, 14 NIPA compared, 217, 219-221 Consumer demand functions, 49-50, 306 product sampling and item identification, Consumer Expenditure Survey (CEX), 42, 79, 107-108, 250 213 proxy prices, 72, 120, 307 accuracy, 12, 36, 253-256, 261 PSU, 278-279, 310 cost, 234, 253, 261 quality adjustments, 14, 16, 27, 39, 106, defined, 306, 307 107, 110 n.3, 111, 112-122, 116-121, description of, 189, 238, 244, 280-281 130-137, 209-210 Diary Survey, 257, 280-281 quantity-base period, 276-277 expenditure weights, 11-12, 36, 253-256, recalculation (CPI-U-RS), 202 n.8, 220, 307 261, 274-275 reference period, 42, 276 frequency, 164-165, 256-257, 275 research series, 210 NIPA expenditure estimates compared, 214 revision frequency, 115, 166 n.13, 221 POPS integrated with, 37, 264-266, 275 structure and elements, 23-24, 156, 163, Quarterly Interview Panel Survey, 257, 280 278-280, 307, 309 questionnaire and structural issues, 36, 261- substitution behavior and, 15-16, 23-25, 26, 262 169-170, 113 research needs, 11-12, 261, 274-275 superlative index, 24-25, 97, 191, 194-195, sample size, 12, 36, 131 n.25, 257-261 207-208, 210

322 INDEX theoretical basis, 73 and substitution, 5, 21-23, 59, 70, 224 urban sample (CPI-U), 197-198, 203 n.11, and taste change, 24, 69 207, 211, 228, 247, 249, 250, 257, 307 theory, 43-46 uses, 1, 13-14, 35, 192, 218 time reversal test, 76-77 wage-earner sample (CPI-W), 197-198, 203 Cost-of-living index (COLI) n.11, 207, 228, 246, 250, 257, 307 aggregation, 4, 15, 51-52, 53, 61-62, 85-86, weights/weighting, 11-12, 14, 15, 26, 104, 242 163, 179, 180, 198, 227, 307 base period, 80-81, 82, 91, 92 Consumer substitution calculation, 43-44, 49-50, 172 COGI and, 5, 21-23, 25, 59, 70 CES, 91-93 COLI and, 2, 6, 25, 39, 47-48, 50-51, 52- choice-based, 53-55, 57 53, 57, 58, 59-62, 66, 90 COGI compared, 2-3, 16, 18-19, 24, 38-39, conceptual issues, 2, 3, 39, 47-48, 50-51, 57-72 52-53, 58, 59-62, 242 comparison period, 41, 48-49, 51, 53 defined, 306 compensation calculation, 48, 51, 58, 61, and domain, 66, 95 70-71, 81, 153 full-service retail to discount outlets, 169- conceptual bases, 2-3, 14, 15, 16, 18-19, 170, 173 38-39, 41, 43, 46-53, 57, 58, 65-68, 69, heterogeneity of, 26, 224 79-93, 283-292 standard of living and, 73, 215 n.24 conditional, 3, 4, 39, 65-68, 69, 70, 73, 86- superlative index and, 5-6, 23, 25, 60, 61, 90, 94-96, 115, 306 84, 85, 93, 96, 113 n.6, 215 cost/expenditure function, 80, 82, 83-84, Contingent valuation, 98 85, 86, 89-90 Contract rents, 307 counterfactual cost, 80, 91 Cost functions, 80, 82, 83-84, 85, 86, 91-92 criticisms and controversies, 15-16, 52-53 conditional, 88-90 data collection, 289-292 Gorman polar form, 245 defined, 2, 15, 95, 306 rationed, 90 demand functions, 49-50, 63, 83, 84 Cost-of-goods index (COGI). See also democratic, 52, 242, 288, 292 Laspeyres index; Paasche indexes domain, 3-4, 17, 19-21, 39, 65-68, 69, 70, aggregation, 43, 77-79 73, 86-90, 94-100, 104, 306 augmented, 103 equivalent variation, 81, 153 averages of, 76-77, 82 expenditure, 195 base period, 41, 42, 74, 77 Fisher ideal index as, 50, 52, 60, 286, 287, bias, 59 288 COLI compared, 2-3, 16, 18-19, 24, 38-39, geometric means formula, 5, 23, 24, 39, 50, 57-72 60, 77, 127, 210, 215 n.24, 279-280, comparison period, 16, 21-23, 41, 42, 74 308 compensation issues, 70, 71 homotheticity of preferences, 49, 50-51, 60, conceptual bases, 2-3, 14, 16, 18-19, 38-39, 82, 84, 308 41, 42-46, 47, 48-49, 50, 57, 74-79 income effects, 2, 90 defined, 1-2, 44, 306 index numbers, 80, 91 domain, 19, 65-66, 94, 95 indifference curve, 80, 86, 90, 91 item replacement, 111-112 item replacement methods, 110 mathematical approach, 74-79 Laspeyres–Paasche index relationship in, objectives, 16 23, 47, 48-49, 51, 80-82, 87, 90-91, outlet substitution bias, 8, 172, 176 285, 287-289 public understanding of, 58 mathematical approach, 79-83, 90-91 quality adjustment, 62-64, 111-112, 123 medical care, 19, 86-90 rationale for, 43 multiperiod, 104 n.10 reference period, 16, 21-23, 41, 74 new goods bias, 8, 31, 160, 161

INDEX 323 objectives, 15, 16 integrated CEX/POPS, 37, 264-266, 271, 275 outlet substitution bias, 8, 168, 172, 174, lagged, 6, 15, 25, 31-32, 42-43, 50, 57, 61, 176 76, 129, 144, 165, 183, 219-220, 256- plutocratic, 52, 242, 244, 287-288, 292 257 public understanding of, 58-59 from manufacturers/vendors, 132 n.26 quality adjustment, 2, 3, 18-19, 39, 57, 62- MCPI, 9, 183 64, 86-90, 109-114, 115, 123, 168 modified Laspeyres, 276-277 reference period, 41, 47-49, 51-52, 53, 82 new goods, 30-32, 163-165 representative consumer, 241-246 nonsampling errors, 260 n.5 satisfaction-based, 55-57 POPS/TPOPS, 11, 36-37, 163-164, 167- Slutsky matrix, 90, 91 168, 227 n.3, 232, 233 n.5, 234, 262, social, 51-52, 85-86 267, 281-282, 310 standard-of-living measurement, 3, 15 n.2, recommendations, 5, 11-12, 241, 261, 274- 19, 41, 46-47, 48, 49, 55-56, 59, 63, 69, 276 80, 82, 95 sample rotation, 8, 31, 33, 119-120, 140, statistical definition and estimation of, 283- 156, 157, 163, 164, 165, 167, 172 291 sampling errors, 260 n.5 substitution effects, 3, 6, 15-16, 39, 47-48, with scanners, 5, 43, 45, 129, 142 n.35, 50-51, 52-53, 57, 58, 59-62, 66, 90, 224 197, 233, 234, 235, 236, 241, 266-273, superlative indexes as, 50-51, 57 275, 289, 291 and taste change, 2, 16, 24, 69-70 scope of, 23, 27, 226-227 Taylor series approximation, 90-91 Standard Industrial Classification system, theoretical bases, 2, 4, 15, 19, 40, 46-53, 264 58, 79, 83, 110, 113 for subgroup indexes, 4, 5, 27, 197, 226- “true,” 1, 13, 14, 48, 81, 82 228, 229, 231-235, 241 unconditional, 4, 17, 66, 68, 69, 70, 73, 96- Deletion method, 117, 118, 119-120, 125, 128, 98, 115 135, 136-137, 139, 305, 307 utility function, 53-55, 79-80, 82, 83-84, 85, Demand 86-87 aggregation, 243, 244 Counterfactual cost, 80, 91 functions, 49-50, 63, 83, 84 Crime rates, 4, 20, 73, 95, 97, 98 for new commodities, 158 n.6, 159-160 Cross-outlet price linking, 169, 171 Democratic indexes Current Population Survey (CPS), 201-202, aggregation, 4, 5, 26-27, 45, 77-79, 86, 235 234, 274 n.9 data collection for, 215-216, 223, 252, 270- 271 D defined, 52, 307 new goods in, 160 n.8, 162 Data collection for CPI, 306 for public transfer program indexing, 198- C&S Survey, 11, 36, 37, 252, 263, 281-282 199 CEX, 11-12, 24, 36, 213, 227, 234, 236, for subgroups, 5, 26-27, 229, 237-240 241, 244, 252-263, 271-272, 274, 280- Demographic issues, and index construction, 281 24-25, 26, 32, 53, 110, 172-173 and conceptual bases for indexes, 15, 42-43, Design of indexes. See also Conceptual bases 50, 197 for indexes; Domain of indexes; Public costs, 232, 234, 271 transfer payment indexing; Social for democratic indexes, 215-216, 223 security benefits for hedonic quality change adjustments, and conceptual framework, 11, 40, 42, 43, 124, 126 n.19, 128-129, 131-132, 135, 97, 191-192 143, 144 inflation-indexed treasury securities, 192, heterogeneity of consumers and, 27, 223, 210-212 231, 241

324 INDEX inflation indicators, 216-221 Durable goods, 71-72, 230 n.4 limits on, 35 DVDs, 131, 138 for monetary policy setting, 35, 40, 192, 216-221 as output deflator, 35, 214-216, 218 E for poverty line, 40 e-Commerce, 170-173 for private contracts, 35, 192, 208-210, 218 for social security compensation, 11, 35, 40, Econometric modeling 43, 48, 192 of demand functions, 49-50, 63 of new goods, 160 tax-related, 35, 40, 43, 192, 212-214 wage-related, 11, 35, 199-206, 207-208 of quality adjustments, 63, 64, 139, 145-146 Diewert, W. Erwin, 23 Economic theory of consumer behavior, 2, 19, 40, 46-53, 58, 79, 83, 110, 242, 243 Direct characteristics method, 126, 128-129, 133, 142, 143-144, 152-154 Elderly, price indexes for, 11, 196-197, 199, Direct comparison method, 109, 116-118, 139, 207, 228-229, 249-251 Employer-paid benefits, 9, 10, 21, 98, 103-105, 307 Direct consumption costs, 213 179, 201, 220 Direct time dummy method, 126-128, 143, Employment Cost Index (ECI), 201 Entry-level items (ELI), 136, 140, 155 n.1, 164, 145-146, 151-152, 153 Directed reinitiation, 155 n.1 165, 167, 234, 236, 262, 307 Disaggregation of households, 45 Environmental (outside) variables benefit—cost assessment, 100 n.7 Domain of indexes. See also Design of indexes COGI, 19, 65-66, 94, 95 conceptual issues, 66-67, 69, 94-98 compensation issues, 21, 70, 103-105 CPI domain, 4, 19, 73, 105 measurement, 16, 19, 20-21, 98-102 conceptual issues, 3, 65-68, 94, 96-98 conditional COLI, 4, 39, 65-68, 69, 70, 73, superlative indexes and, 53 86-90, 95-96, 306 taxes and, 20-21, 103 theoretical framework, 86-87, 88 CPI, 3-4, 16, 17, 19-21, 73, 94, 105 cross-place comparisons, 66-67 Equivalent variation, 81, 153 current practice, 65 Expenditure function, 80 Expenditure weight, 26-27, 52, 86, 166, 167, and economic indicators, 97 employer-paid benefits, 21, 98, 103-105 307 environmental variables, 4, 16, 19-20, 66- Expenditure-weighted averaging, 26, 52, 60 67, 73, 94-102, 105 MCPI, 9, 10, 95, 97-98, 178-179, 185-186, 189-190, 220 F measurement problems, 20, 21, 97, 98-102 Fads, 159 n.7 NIPA, 220 Federal income tax system. See Taxes public goods, 4, 19-21, 94, 96, 98-102, 104 Fisher ideal index and public transfer programs, 97 for aggregation, 52, 86, 215, 221, 248 quality changes and, 67, 95, 97-98, 101 COLI approximation, 82, 83-84 recommendations, 4, 105 construction approach, 42-43, 50 separability issue, 68 defined, 77, 308, 310 substitution and, 66, 95 introduction of new goods, 162 n.10 superlative indexes, 95-96 mathematical approach, 77, 83-84, 85 supplemental indexes and satellite accounts, plutocratic, 79 4, 101-102, 103, 105 production lag, 42-43 taxes and, 20-21, 97, 102-103 publication of research series, 210 technological changes and, 67-68, 88-89, 97 quality change adjustment, 152, 153 unconditional COLI, 4, 17, 66, 68, 69, 70, real-time, 219-220 96-98 and substitution bias, 23, 52, 60, 248 n.18

INDEX 325 Fisher, Irving, 23, 41 limitations of methods, 140 Fixed-weight index, 308 list price vs. transaction price, 132 Food and beverages, 64, 83, 112, 117, 146, mathematical description of, 123-124, 149- 159, 160, 170, 173, 174 154 in MCPI, 187-188 new goods and, 7 G outlet substitution and, 174, 176 panel cautions, 6-7, 133-134, 139-140, 141, Geometric means formula, 5, 23, 24, 39, 50, 144-145 60, 77, 127, 210, 215 n.24, 308 principle, 6, 122 Gillingham-Greenlees exact index, 213-214 recommendations, 6-7, 140-146 “Goodness” of goods, 64 reliability, 7, 124, 129-130 Griliches neutrality, 151, 152 time dummy method, 126-128, 143, 145- Gross domestic product (GDP), 13-14, 98 n.4, 146, 151-152, 153 100, 179, 209, 211, 216, 217, 218, 220, updating intensities, 144 221, 240 uses, 29, 122, 123, 124, 130, 135 Group indexes. See Subgroup indexes Hedonic treadmill hypothesis, 56, 69-70 Heterogeneity. See also Subgroup indexes across-stratum, 223-224, 227, 229 H and aggregation, 4, 26, 125 n.18, 223-226, Health insurance, 9, 10, 21, 104-105, 179-180, 229, 240-241 185-188, 189, 203, 220 and construction of indexes, 18, 26, 226, Health status, as utility function, 87-90, 95, 187 240-241 Hedonic functions, 123, 149 and data collection methods, 223, 241 Hedonic quality adjustment, 64 and hedonic quality adjustment methods, advantages, 123 124-125 assessment of methods, 7, 145-146 and inflation rates, 222, 225-226 audit of other methods with, 6, 120, 128 and outcomes-adjusted medical index, backward-looking method, 150 184 bias in, 128, 129, 133, 139, 140 in prices paid, 46, 225-226, 227 n.3 BLS application of, 108, 113 n.6, 129-140 public goods preferences, 99 n.6 brand-specific, 132-133, 145-146 in substitution behavior, 26, 224 candidates for, 28-29, 119, 124, 130-132, 142 within-stratum, 223, 227-228 characteristics method, 126, 128-129, 133, Household 142, 143-144, 152-154 aggregation across, 4, 223-226, 240-246 comparability decisions for, 6, 28, 29, 134- disaggregation into individual members, 45 139, 140, 142, 145 furnishings and equipment, 72, 254 complementary products, 142-143 modeling non-unitary behavior, 45 consumer heterogeneity and, 124-125 production function, 123 n.16 CPI model, 6-7, 132-137, 138, 139-140, scanner technology, 271-272 141 Housing. See Shelter data requirements, 124, 126 n.19, 128-129, 131-132, 135, 143, 144, 269 defined, 101 I direct methods, 29, 121, 126-129, 134, 143- Imputation of prices, 121, 136, 159, 305 144, 151-154, 306, 307 Income distribution, 24-25, 26, 53, 199, 206, effect on CPI, 134-137, 138 227, 239-240, 243 forward-looking method, 150 Income effects, 2, 90, 224 indirect methods, 29, 125-126, 127 n.22, Index drift, 167, 168 n.17, 257, 308 129, 130, 132, 134, 135-136, 144, 150- Indifference curve, 80, 86, 90, 91 151, 308-309 Individual price indexes, 44-46, 78-79

326 INDEX Inflation rates K age stratification, 246, 249-251 core, 218 Konus, Alexander, 23 effects of bias in indexes, 217-218 heterogeneity and, 222, 225-226 income stratification, 239-240, 247-249 L long-run, 61 Laspeyres index, 308 macroeconomic policy indicators, 1, 97, advantages, 44, 60, 75-76 198, 216-221 aggregation, 77-79, 86 NIPA vs. CPI, 217 and COLI, 47, 48-49, 50, 51, 53, 59, 80-82, quality change adjustments and, 27, 225 87, 90-91 and relative price variation, 225 complexity, 58 stripped, 218-219 conceptual basis, 42 subgroup differences, 222, 239-240, 246- defined, 42, 44, 309 251 democratic, 242 tax-rate indexing, 13, 40, 43, 212-214, domain, 68 222 escalation with, 81, 215 Treasury securities indexed to, 1, 192, 210- as inflation indicator, 218, 247, 248 212 introduction of new goods, 158 n.6, 161- Information Resources, Inc., 266, 271 162 Input substitution, 10, 181-184, 188-189 mathematical approach, 74-79 Interest rates (nominal), 72 modified for CPI, 25, 62, 97 n.2, 111, 114, Internet, 45, 170-173 168 n.17, 272-273, 306, 309 Item reclassification, 31, 155, 162, 163, 165- national vs. individual, 44-46, 78 166, 167 outlet rotation and, 168 n.17 Item replacement. See also Substitution quality adjustments, 111-112, 129, 152, class-mean method, 117, 118, 119, 121, 134 153, 154 n.30, 136-137, 139, 305-306 quantity used for pricing, 72, 78, 82-83 COLI calculations, 110 representative agent, 246, 247, 248 comparability decisions by analysts, 6, 28, seasoned, 62 29, 116-117, 118, 134-139, 140, 142, substitution bias, 5, 21-23, 24, 59, 60, 62, 145 251 n.20 defined, 106, 309 utility function, 92 deletion method, 117, 118, 119-120, 125, weights, 45, 75 128, 135, 136-137, 139, 305, 307 Law of one price, 169 n.18, 172, 180, 187 direct comparison method, 109, 116-118, Life expectancy, 4, 20, 28, 67, 73, 96, 97-98, 139, 307 184 explicit cost-based adjustment, 28-29, 118- Link period, 309 119, 125, 134, 307-308 in-store procedure, 125, 126, 134, 156 overlap pricing, 117, 118, 119, 310 M quality adjustments, 28-29, 31, 106, 110, 116-121, 125, 130-132, 135, 156 Macroeconomic policy, inflation indicators for, research recommendations, 141 1, 35, 40, 97, 192, 216-221 targeted, 8, 130-132, 164, 166 Marshall Edgeworth price index, 77 within-sample, 156, 161 Medical Care Price Index (MCPI) Item rotation, 31, 164, 168 aggregation, 182, 188 Item strata, 23, 156, 162, 164, 167, 307, 309, bias in, 148, 185-186, 188, 250-251 311 conceptual issues, 17-18, 19, 30, 96, 181- Item weighting, 247-248, 309 185

INDEX 327 consumer heterogeneity and, 224, 228 item reclassification, 31, 155, 162, 163, current procedures, 178-181 165-166, 167 data collection, 9, 183, 255-256 measurement issues, 7, 31-32 defined, 309 outlet rotation and, 7, 31, 32, 135, 155, 164, diagnosis-based pricing, 9, 182-184, 188-189 168 domain, 9, 10, 20 n.5, 86-90, 96, 97-98, in output-change indexes, 215, 216 105, 178-179, 185-186, 189-190, 220 plutocratic vs. democratic index, 160 n.8, 162 for the elderly, 197, 203, 249, 250-251 price cycle, 32, 161-163 health insurance considerations, 9, 10, 21, quality-improved items, 31, 156, 161 104-105, 179-180, 185-188, 189, 220, recommended adjustments for, 8, 160-161, 255 165 hospital and physician services, 30, 112, sample rotation frequency, 8, 31, 163-164, 148, 181 165, 167 input substitution, 10, 181-182, 188-189 supplemental, 107, 155 n.1, 163 measurement issues, 17-18, 181-185 valuation of, 3, 18, 64, 73, 110, 155, 157-161 outcomes-adjusted, 10, 181, 184, 187, 190 variety considerations, 110 n.3, 114, 146 prescription drugs, 30, 112, 148, 163, 186 virtual price vs. introductory price, 8, 31, quality adjustments, 10, 19, 20 n.5, 28, 30, 157-160, 311 40, 67, 86-90, 112, 114, 117, 148, 181, weight updating, 32, 155, 163, 166, 167 184-185, 187-188, 190 welfare effects, 31, 157, 159, 160 recommendations, 9-10, 105, 188-190 New outlets. See Outlet rotation; Outlet weights, 9, 179, 180, 182, 183, 184, 185, substitution 186, 189, 203, 214 n.22, 220, 255 Nonlinear pricing, 107 Medicare and Medicaid, 9, 180, 182, 185, 203, Nonsampling errors, 260 n.5 214 n.22, 220, 225, 255 Norwood, Janet, 228 Microwave ovens, 29, 116, 118, 131, 133, 137- 138 Motor vehicle accident rates, 96 O Outcome pricing, 190 N Output deflation, 1, 13-14, 35, 98, 101-102, 214-216, 218, 240 National Bureau of Economic Research, 311 Outlet rotation National economic accounts, 4, 20, 101-102, cross-outlet price linking, 169, 171 105 current practice, 167-173 National Income and Products Accounts, 89, defined, 309 102 n.8, 179, 203, 214-215, 216, 217, e-commerce and, 170-173 219-221, 253, 254 hedonic techniques applied to, 174, 176 National price indexes, 4, 8, 25, 26, 44-46, 78- market shift to discount stores and, 8, 33, 79, 87, 160, 214, 219-221 169-170, 173, 176 National security, 21, 96, 97 new-product introduction, 7, 31, 32, 135, New goods 155, 164, 168 bias, 31, 32, 107-108, 112-121, 146-148, pricing components, 9, 171, 172, 174-175, 156-158, 160-161, 162, 273 176, 263 data collection issues, 30-32, 163-165, 273 probability of selection, 167-168 defined, 7, 155-156 purpose, 167-168 demand for, 158 n.6, 159-160 quality-related issues, 8-9, 32-33, 168-170, effect, 31-32, 67-68 171, 172, 173, 174-175, 176 improved goods contrasted, 106-107 recommendations, 9, 176-177 introduction into index, 7-8, 31-32, 97-98, sampling frequency, 33, 164, 173 111, 112, 120 n.12, 131 n.25, 135, 155 substitution bias, 8, 33, 128, 168 n.16, 170, n.1, 161-167 172, 173-174

328 INDEX Outlet substitution, 8, 128, 168-170, 172, 173- Private contracts, indexing, 35, 97, 192, 208- 174, 176, 224, 230, 273, 310 210, 218 Overlap pricing, 117, 118, 119, 176, 310 Private goods as bundles of characteristics, 122-123 characteristics, 108, 111, 112 P defined, 20, 310 domain of CPI, 4 Paasche indexes, 308 government-produced and -sold, 19, 20, 94 aggregation, 77-79 n.1 averaging, 79 separability from public goods, 68 COLI and, 48-49, 50, 51, 53, 80-82, 87, 91 Producer price index (PPI), 130, 148, 174 n.23, conceptual basis, 42 209, 219, 220 defined, 42, 44, 310 PSU, 278-279, 281-282, 310 democratic, 79 Public goods introduction of new goods, 158 n.6, 162 defined, 20, 310 mathematical approach, 75-79, 91 domain considerations, 19, 20-21, 94, 96, national vs. individual, 79 98-100, 102-103, 104 quality adjustments, 129, 152, 153, 154 pure, 21 representative agent, 246, 247, 248 sales taxes and, 21, 102-103 substitution bias, 22-23, 251 n.20 separability from private goods, 68, 103 usefulness, 57 valuation problems, 19, 98-100 utility function, 92 Public perceptions Penetration pricing, 163 n.11 of indexes, 39, 58-59 Pension plans, employer-provided, 104, 203- of quality, 111 204 Public transfer payment indexing, 13 Personal consumption expenditure (PCE) data, beneficiaries with other income, 195-197 12, 37, 253-256, 274-275, 310 consumer heterogeneity and, 226, 231 Personal consumption expenditure (PCE) CPI-U vs. CPI-W, 193, 197-198 deflator, 220, 221, 310 criticisms of CPI, 13 Plutocratic indexes domain issues, 97 aggregation, 4, 5, 26-27, 45, 77-79, 86, 235 for elderly people, 196-197, 207 n.9 lagged superlative index for escalation, 24, bias, 244 25, 191, 194-195 COLI, 52, 242, 244 plutocratic vs. democratic indexes, 198-199, defined, 52, 222, 310 240 introduction of new goods, 160 n.8, 162 poverty-related programs, 206-207, 247 output-change measurement, 215 recommendations, 194-195 for public transfer program indexing, 198- social security adjustments, 13, 25, 193- 199 199, 200, 204-206 for subgroups, 5, 26-27, 229, 237-240 SSI, 193, 206 Point of Purchase Survey (POPS/TPOPS), 11, for subgroups, 192-193, 206, 231 36-37, 163, 167-168, 227 n.3, 232, 233 tax considerations, 195-196 n.5, 234, 262, 264-266, 272, 281-282, wage indexes, 199-206 310 Pure price changes, 29, 127, 216, 230 Pollution, 4, 97, 98, 101-102, 103 Preferences and COLI, 47, 49, 50, 54, 79-80 Q flexible functional form, 84, 86, 142 n.35 homothetic, 49, 50-51, 60, 82, 84, 92, 308 Quality change adjustments revealed, 54, 99 and aggregation, 125 n.18 separability of, 68 apparel, 29, 117, 118, 120, 130, 147 Price heterogeneity, 46, 225-226

INDEX 329 appliances and electronics, 29, 107, 109, valuation of new goods, 3, 18, 64, 73, 156 110, 114, 118, 120 n.12, 130, 131, 132, variety of goods and, 110 n.3, 114 n.8 133, 147 wage indexes, 204, 209-210 bias in, 27-28, 112-114, 121-122, 129, 133, within-sample, 115, 121-122, 140, 156 139, 140, 144, 249 Quality-of-life metrics, 185 BLS approaches, 39, 73, 114-122, 129-140 Boskin Commission criticisms, 27-28, 109 n.2, 112-114, 115, 116-117, 119, 120, R 146-148 Reference period, 306, 309, 310, 311 COGI view, 2, 62-64, 111-112 COLI view, 2, 3, 18-19, 39, 57, 62-64, 86- conceptual issues, 41, 42, 47-49, 51 90, 109-111, 112-114, 115 hedonic function, 125 Regional/city price indexes, 66-67, 237, 252 conceptual issues, 14, 19, 28, 30, 39, 40, 57, 59, 62-64, 98, 106 Representative consumer, 241-243 cost-based, 28-29, 118-119, 125, 134, 307- COLI for, 244-246 conditions for existence of, 243-244 308 in CPI, 14, 16, 18-19, 27, 39, 106, 111, Retail Trade Survey, 255 112-114, 115, 116-121, 130-137, 209- 210 defined, 114 S domain issues, 67, 95, 97-98, 101, 115 Sample rotation, 8, 31, 33, 119-120, 140, 156, durability of goods and, 71-72 157, 163-164, 165, 167, 172 food and beverages, 64, 108, 112, 117, 123, Sampling errors, 260 n.5 146 Satellite accounts, 4, 101-102, 103, 105 forms of, 106-107 Satisfaction. See also Utility and inflation rates, 27, 225 concept, 47, 53, 55-57 item replacement methods, 27, 28-29, 31, hedonic treadmill hypothesis, 56, 69-70 106, 110, 111, 116-121, 134, 140-141 measures of, 55-57 items targeted for, 130-132 and utility, 55-57 measurement/modeling, 28-30, 63-64, 108, Scanner data 122; see also Hedonic quality and COLI-based CPI, 272-273, 275 adjustment and hedonic modeling, 142 n.35 medical care, 10, 19, 20 n.5, 28, 30, 40, 67, household-based technology, 271-272, 275 86-90, 96, 112, 114, 117, 148, 184-185, limitations, 270-271 187-188, 190 point-of-sale, 266-271, 275 new goods bias, 31, 107-108, 112-114, 115, and quality of CEX and POPS, 272 146-148, 156, 161 Seasoning procedure, 62 outlet rotation and, 8-9, 168-170, 171, 172, Semiconductors, 162 173, 174-175, 176 Separability of preferences, 68 per unit approximations, 107 Services private contracts, 209-210 expenditure categories, 115, 122, 141, 148 rates, 106, 137, 139 flows from consumer capital goods, 33-35, recommendations and cautions, 140-146 71-72, 102 repackaging framework, 107-108, 111-112, pricing, 163 n.12, 172 116-117, 156 Shadow price, 90, 158 for services, 115, 122, 141-142, 148, 168 Shelter shelter, 146-147 compensation issues, 70-71 subgroup indexes and, 230 consumer heterogeneity and, 224, 236 n.11 taste change and, 16, 64, 69, 95, 111 data collection, 254, 256, 262 n.6, 263 transportation, 28-29, 109, 110, 111, 117, homeowners vs. renters, 70-71, 72 119, 123, 147-148 item category, 307

330 INDEX outlet substitution and, 170 costs, 232-235 price indexes, 45, 72 data collection, 4, 5, 27, 197, 226-228, 229, quality adjustments, 29, 130, 146-147 231-235, 252, 276 service flows from housing, 33-35 for elderly people, 11, 27, 125, 196-197, Shephard’s Lemma, 82-83, 90, 91 199, 227, 228-229, 231, 249-251 Slutsky matrix, 90, 91 income-stratified, 27, 125, 206-207, 227, Social cost-of-living index, 51-52, 85-86, 242 231, 247-249 Social issues, 96 inflation rates and, 246-251 Social security benefits plutocratic vs. democratic weights, 5, 26- aggregation issues, 4, 200-201 27, 229, 235 n.9, 237-240 bias in CPI, 14 and quality changes, 125, 230, 251 consumer heterogeneity and, 226 recommendations, 5, 97 n.2 cost-of-living adjustments, 1, 11, 13, 25, 40, with reference-period weights, 194 48, 61, 193-195, 198, 240 research and testing suggestions, 235-237 CPI-U tied to, 198 sample size, 233, 234 democratic vs. plutocratic weights, 240 of strata prices, 234, 238-239 design of indexes, 11, 35, 40, 43, 48, 192 uses, 231 domain issues, 97, 104, 196 Substitution. See also Consumer substitution employers’ contributions to, 104 and aggregation, 24-25, 26, 52 initial retirement benefit, 200 bias, 59-62, 93, 113, 128, 147, 168 n.16, other income with, 71, 195-197 170, 172, 173-174, 248 n.18 rate of increase, 205-206 CPI, 15-16, 23-25, 113, 224, 230 superlative index for escalation, 11, 6, 25, data collection methods and, 269 61, 198 elasticity of, 6, 60-61, 91-93, 194, 269 tax-and-price index tied to, 195-196 input, 10, 181-184, 188-189 timeliness of data collection, 6, 43 lower-level, 147, 309 wage-based indexing, 11, 199, 200-201, new goods, 164-165 204-206, 246 n.17 outlet, 118, 128, 135, 168 n.16, 170, 172, Standard of living 173-174, 310 compensation issues, 48, 71 upper-level, 311 defined, 311 within-strata effect, 5 environmental considerations, 19, 95, 96-97 Superlative indexes. See also Fisher ideal measurement for COLI, 15 n.2, 41, 46-47, index; Törnqvist index; Walsh price 48, 49, 55-56, 59, 63, 69, 80 index public goods and, 98 advance estimate of, 195 quality of goods and, 63 aggregation, 52, 53, 215 satisfaction and, 55-56 as COLI approximation, 50-51, 57, 95-96 social security recipients, 71, 97 compensation calculations, 60, 61, 194-195 substitution behavior and, 73 conceptual bases, 50-51, 53, 83-85 Stigler committee, 1, 3, 14, 38, 73, 122 n.14, data collection for, 259, 272-273 311 defined, 308, 311 Stochastic approach, 41-42, 68 domain, 95-96 Stocks and flows, 33-35, 71-72, 102 endorsement for CPI, 97 n.2 Subgroup indexes. See also Aggregation; environmental variables, 53, 87, 95-96 Heterogeneity as inflation indicator, 218, 248 aggregation issues, 4, 5, 26-27, 229 introduction of new goods, 162 n.10 assembly of data for, 232-235 lagged for escalation, 24, 25, 191, 194-195, barriers to production, 226-228 207-208, 210 biases, 250, 251 mathematical approach, 83-85 conceptual bases, 229-232 quality adjustments, 129, 131

INDEX 331 from social aggregate indexes, 86 Tiebout hypothesis, 99 n.6 for social security cost-of-living Time reversal test, 76-77 adjustments, 11, 6, 25, 61, 198 Törnqvist index, 85, 93, 248, 311 substitution effect, 5, 6, 23, 24, 25, 60, 61, Transaction costs, 71, 72 84, 85, 93, 96, 113 n.6, 215 Transfer payments. See Public transfer payment taste changes and, 25 indexing; Social security benefits; Supplemental goods, 107, 155 n.1, 163 specific programs Supplemental Security Income (SSI), 206-207 Transportation, 72, 109, 112, 117, 122, 147- 148, 173, 233 n.7 Treasury Department, 259 T Treasury Inflation-Protected Securities (TIPS), 1, 192, 210-212 Taste changes COGI vs. COLI, 2, 16, 24-25, 69-70 conceptual issues, 53, 59, 64, 67, 69-70 U domain issues, 67, 69, 95 habit formation, 70 Union wage contracts, 13, 207-208, 218 and quality changes, 16, 64, 69, 110 n.3 Unit pricing, 268-269 and substitution effect, 25 Unit value indexes, 236 Tax-and-price index, 195-196 User costs, 34, 71-72 Taxes Utility aggregation across households, 4 and choice, 47, 53-55, 110 n.3 consumer heterogeneity and, 226 decision, 54-55, 57 data collection issues, 270 defined, 53-54, 311 democratic vs. plutocratic weights, 240 duration neglect bias, 54 design of indexes, 35, 40, 43, 192, 212-214 environmental factors and, 86-87 direct consumption costs, 213 experienced, 54, 55, 56-57 domain issues, 20-21, 97, 102-103 function, 79-80, 83-84, 85, 86-90, 92 exact indexation measure, 213-214 measures of, 53, 54, 55, 57 indirect, 102 n.8, 195 predicted, 54 public goods offset to, 20-21, 102-103 remembered, 54 and public transfer program indexing, 97, satisfaction and, 55-57 195-196 rate-related indexing, 13, 40, 43, 212-214 Taylor series approximation, 90-91 V Technological change, 45, 53 domain issues, 67-68, 88-89, 97 Variety of goods, 110 n.3, 114, 146 VCRs, 8, 31, 115, 131, 132, 133, 137, 138, “new goods” effect, 67-68, 162 Televisions, 29, 110, 130, 133, 135, 137, 142, 139, 156, 162, 163, 165, 166 147 Virtual price, 8, 31, 157-160, 311 Test approach, 41-42, 50, 68, 267 Theoretical bases of indexes basket-price, 43-46 W and conceptual basis, 39, 40, 43-58, 73, 74- Wage indexes 93 aggregation issues, 200-201 cost-of-living, 2, 15, 40, 46-53, 58, 79, 83, alternatives, 199-206 86, 110, 113 design issues, 11, 35, 199-206, 207-208 CPI, 4, 73 employer-paid benefits in, 201-204 criticisms of, 40, 52-53 escalators in union contracts, 13, 207-208 satisfaction and, 47, 55-57 hourly earnings, 202 n.9 utility and choice and, 47, 53-55, 110 n.3 macroeconomic implications, 205, 218

332 INDEX mean wage measure, 202, 203 n.10 item (upper-level), 97 n.2, 309 median wage measure, 202, 205 Laspeyres index, 45, 75 quality adjustments in, 204 MCPI, 9, 179, 180, 182, 183, 184, 185, 186, social security benefits tied to, 11, 199, 200, 189, 214 n.22, 220 204-206 for new products, 8, 32, 155, 163, 166, 167 Walsh price index, 77, 85 plutocratic, 45, 78, 79, 237-240 Weighted arithmetic mean, 75, 215 n.24 updating, 8, 32, 96, 155, 163, 166, 167 Weighted harmonic mean, 75, 79 Welfare effects, 31, 157, 159, 160, 242 Weights/weighting Welfare index, 14 across-stratum, 227 Well-being, inputs to, 109-110, 115 democratic, 45, 78, 237-240 Within-sample expenditure, 26, 45, 60, 76 n.1, 86, 166, item replacement, 156, 161 167, 198, 227, 307 quality adjustments, 115, 121-122 fixed-weight index, 308

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How well does the consumer price index (CPI) reflect the changes that people actually face in living costs—from apples to computers to health care? Given how it is used, is it desirable to construct the CPI as a cost-of-living index (COLI)? With what level of accuracy is it possible to construct a single index that represents changes in the living costs of the nation's diverse population?

At What Price? examines the foundations for consumer price indexes, comparing the conceptual and practical strengths, weaknesses, and limitations of traditional "fixed basket" and COLI approaches. The book delves into a range of complex issues, from how to deal with the changing quality of goods and services, including difficult-to-define medical services, to how to weight the expenditure patterns of different consumers. It sorts through the key attributes and underlying assumptions that define each index type in order to answer the question: Should a COLI framework be used in constructing the U.S. CPI?

In answering this question, the book makes recommendations as to how the Bureau of Labor Statistics can continue to improve the accuracy and relevance of the CPI. With conclusions that could affect the amount of your next pay raise, At What Price? is important to everyone, and a must-read for policy makers, researchers, and employers.

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