for the same product (price heterogeneity). It is still straightforward to imagine a price index for each family; one could simply take a family’s basket in a base year and price it at the reference and current market prices paid by that family. The difficulty arises at the national level; an aggregate national bundle is priced, not at the specific prices that individuals actually pay, but at prices that are averaged over all the prices paid. But such an index is not related to the individual indexes in any predictable way; in particular, the national index is no longer a weighted average of the individual indexes. More generally, it is hard to derive any good rationale for the aggregate index when price heterogeneity is important. As always, one remedy is to assume away the problem, which, in effect, is what the BLS currently does. It is a good solution if price heterogeneity is not very important, except for a few goods such as shelter and medical care, both of which require special treatment in any case. If price heterogeneity is important, or if technical change (such as the Internet) allows even greater possibilities in the future than now for firms to charge different prices to different people, there is no good alternative to working at the individual level, at least conceptually. Price indexes would be calculated for each household, or at least for a random sample of households from the population, and averaged to obtain the national index. This radical departure from current practice has many attractions but is almost certainly not feasible given current technology for data collection. We explore these matters further in Chapter 8 on aggregating across households.

When thinking about aggregation from households to nations, it is also worth giving consideration to the opposite process, that of disaggregating households into their individual members. We have used the terms individuals, families, and households more or less interchangeably, contrasting them with national aggregates. Yet multiperson households are themselves collections of individuals whose interests do not always coincide. In the next subsection we deal with the textbook “consumer,” who is assumed to make consistent choices within the available opportunities. If such an account is applied to a family or household, it supposes a unity of purpose and preference that might not be the case in practice. Recent research in economics has gone some way to looking inside the household, thinking about ways to model and to recognize non-unitary behavior. Nevertheless, none of this work has been directed toward the construction of price indexes, and in this report we work within the older tradition of regarding households and families as the basic units of the economy.

Cost-of-Living Indexes

Cost-of-living indexes compare prices, not by looking at the cost of a basket at different sets of prices but at the cost of living at different sets of prices. Basket price indexes work with the cost of specific goods and services; cost-of-living indexes work with the cost of “living.” Measuring the cost of living requires one to compare different baskets of goods and to say when they yield the same



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