Rich Parkin writes: >>Incidentally, Jim, the subst. effects they claim to be addressing are only within product classes (close substitutes) (Purdue v Tyson?) rather than across them (chicken v beef), at least according to the NY Times...<< I stand (or rather, sit) corrected. But if the geo-mean CPI only uses the geo-mean within product classes, shouldn't the "correction" (vis-a-vis the arithmetic mean CPI) be minimal? After all, over the medium run (say, from month to month), the prices of Purdue and Tyson chicken should move together. There are some exceptions, such as Apple vs. IBM-compatible computers, but how many are those? If this is true, then the correction effect would be mostly due to the fact that geometric means are lower, as Peter Dorman says. Dave Richardson writes: >>The argument in favor of the geomean is based largely on the idea that in the Laspeyres framework we are implicitly assuming a Leontieff (rectangular) utility function ... This has the implication that commodities must be consumed in exact proportions regardless of relative prices. The geometric mean implicitly assumes a Cobb-Douglas utility function... In this case the share of income devoted to each commodity is unchanged and the deleterious effect of a price increase can be mitigated by substituting items whose prices have not risen.<< The geo-mean version doesn't consider the transition costs (going from one u-max equilibrium to another). Also, is _utility theory_ the traditional basis of the CPI? Haven't there been other justifications? >>The idea of substitution as a possibility seems plausible to most people.<< I wasn't denying subsitution, just noting its cost. If I'm forced by price changes to eat choice rather than prime cuts, isn't that a sacrifice? or is that a between-product-class shift? >> A more promising tack in this debate is to concentrate on possible sources of downward bias in the index. For example, as technology advances certain products may become necessities. The most common examples are the telephone and the automobile. As "technological progress" has the result of lower density development and declining public transportation, more or less up to date modes of transportation and communication tend to become necessities, thus increasing the cost of living. This effect may not be picked up in the CPI.<< Not only is that effect on in the CPI, but if one considers it, the whole CPI seems to go out the window. If we want a CPI that actually uses utility theory, then we can't ignore this effect. Jim Devine [EMAIL PROTECTED] [EMAIL PROTECTED] "A society is rich when material goods, including capital, are cheap, and human beings dear." -- R.H. Tawney.
