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How to measure living standards and productivity

Oulton, Nicholas (2012) How to measure living standards and productivity. Review of Income and Wealth, 58 (3). pp. 424-456. ISSN 0034-6586

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Identification Number: 10.1111/j.1475-4991.2012.00498.x


I set out a general algorithm for calculating true cost-of-living indices when demand is not homothetic and when the number of products may be large. The non-homothetic case is the important one empirically (Engel's Law). The algorithm can be applied in both time series and cross section. It can also be used to estimate true producer price indices and Total Factor Productivity in the presence of input-biased economies of scale and technical change. The basic idea is to calculate a chain index of prices but with actual budget (cost) shares replaced by compensated shares, i.e. what the shares would have been if consumers (firms) faced actual prices but their utility (output) were held constant at some reference level. The compensated shares can be derived econometrically from the same data as are required for the construction of conventional index numbers. The algorithm is illustrated by applying it to estimating true PPPs for 141 countries and 100 products within household consumption, using data from the World Bank's latest International Comparison Program.

Item Type: Article
Official URL:
Additional Information: © 2012 International Association for Research in Income and Wealth
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HC Economic History and Conditions
JEL classification: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation
D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory
D - Microeconomics > D1 - Household Behavior and Family Economics > D12 - Consumer Economics: Empirical Analysis
D - Microeconomics > D2 - Production and Organizations
D - Microeconomics > D2 - Production and Organizations > D24 - Production; Cost; Capital and Total Factor Productivity; Capacity
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
I - Health, Education, and Welfare > I3 - Welfare and Poverty > I31 - General Welfare; Basic Needs; Living Standards; Quality of Life; Happiness
O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output (Income) Convergence
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 04 May 2012 09:07
Last Modified: 20 Jun 2021 01:54

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