rates that insight into the construction of price indexes. Substitution effects are part of what separate cost-of-living indexes from basket price indexes. Yet it is important to remember that substitution in response to price is only a part of what determines purchasing behavior in the economy; other factors, though important, are sometimes neglected in cost-of-living discussions. The aggregate bundle of goods bought by consumers responds to many forces other than prices and incomes: the demographic composition of the population is constantly changing, by age and by ethnic group; tastes are not constant, nor is the distribution of income; technology changes the nature of goods and the way that people use them. Consequently, when one uses prices together with purchases in the reference and comparison periods to form Paasche, Laspeyres, and superlative indexes, the results may differ from what would be expected if only prices had changed, as in the simplified formulations above. In addition, it is not always clear how to interpret superlative indexes when many different forces affect the pattern of purchases. Diewert (2000b) has shown how superlative indexes can be defined in a way that recognizes changes in the environment. Just as a superlative index applies to levels of living that are intermediate between the base and comparison levels, so can other changes be dealt with, noting that the superlative will apply to intermediate values of environmental variables, such as demographic composition, tastes, or income distribution. Of course, the discussion has now come a long way from the straightforward concepts from which it began.

Theoretically, a COLI seeks to measure the amount of expenditure required for a consumer to be equally satisfied in one time period as in another, or “the minimum expenditure necessary to achieve a base period level of utility” (Boskin et al., 1998:5). In theory, conceptualizing a COLI in terms of satisfaction or utility has the potential to avoid many of the conceptual problems addressed in this report, from substitution to taste and quality changes. From this perspective, what exactly a consumer consumes is irrelevant; we are merely interested in the price tag associated with a given base level of satisfaction or utility, irrespective of the products and services from which this utility is derived. At present, such an approach is utopian because there are no appropriate measures of utility (see below). Instead, the economic theory of consumer behavior sidesteps the issue by assuming that consumers maximize utility by making the appropriate choices. Hence, consumers’ choices can be taken as indicating utility. One result of this theoretical decision is that the choice-based COLI is more similar to a price index than would be the case for a COLI based on other measures of utility.

Utility and Choice

The term utility was originally introduced by Bentham (1789) to refer to pleasures and pains, the “sovereign masters” that “point out what we ought to do, as well as determine what we shall do.” From this perspective, utility is an attribute of momentary experience, and a consumption episode that gives one

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