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COST-OF-LIVING INDEX

Statistics Directorate    
Definition:
An index that measures the change in the minimum expenditures that would be incurred by a utility maximising consumer, whose preferences or tastes remain unchanged, in order to maintaining a given level of utility (or standard of living or welfare).

Context:
The cost-of-living-index (COLI) is not a fixed basket index because consumers may be expected to change the quantities they consume in response to changes in relative prices (see “substitution effect”). The expenditures in the second period cannot usually be observed. COLIs cannot be directly calculated but may be approximated by superlative indices. A conditional cost of living index is one that assumes that all the factors that may influence the consumer’s utility or welfare other than prices (such as the physical environment) do not change.

ILO, IMF, OECD, Eurostat, UNECE, World Bank, 2004, Producer Price Index Manual: Theory and Practice, International Monetary Fund, Washington DC

In theory, the objective behind a cost-of-living index is to measure price changes experienced by consumers in maintaining a constant standard of living. The idea is that consumers would normally switch between products as the price relationship of goods changes.If, for example, consumers get the same satisfaction from drinking tea as they do from drinking coffee, then it is possible to substitute tea for coffee if the price of tea falls relative to the price of coffee. The cheaper of the interchangeable products may be
chosen. (Statistics Canada, Your Guide to the Consumer Price Index, Catalogue No. 62-557-XPB, 1996. Available at: http://www.eco.gov.yk.ca/pdf/cpi_guide.pdf ).

Source Publication:
ILO, IMF, OECD, Eurostat, UNECE, World Bank, 2004, Producer Price Index Manual: Theory and Practice, International Monetary Fund, Washington DC.

Cross References:
Conditional cost of living index
Substitution effect

Hyperlink:
http://www.imf.org/external/np/sta/tegppi/index.htm

Statistical Theme: Prices and purchasing power partities

Created on Friday, July 26, 2002

Last updated on Wednesday, April 17, 2013