I'm still not sure why the substitution effect _necessarily_
means the CPI grows faster then does the cost of living.
If 1) Purdue chicken costs MORE than Tyson chicken, and
2) Purdue chicken FALLS in price then
the substitution should be to the HIGHER priced good.
The relative price of Purdue has fallen, but the substitution
is to the good with a higher absolute price. In this case, the
CPI understates the rise in the cost of living.
It seems that the direction of the substitution bias is an
empirical matter, not a theoretical matter. This issue is
whether high priced goods are more (or less) likely to
experience a decline as are low priced goods. If price
declines occur randomly among low/high priced goods,
then the substitution effect should net out.
Perhaps I'm missing something.
Eric
..
Eric Nilsson
Department of Economics
California State University
San Bernardino, CA 92407
[EMAIL PROTECTED]
