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The true index of cost of living under general equilibrium: The numéraire matters

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  • Guerra, Ana-Isabel
  • Manresa, Antonio
  • Sancho, Ferran

Abstract

The evaluation of welfare effects should be unambiguous. We show that the Konüs true index of cost of living is numéraire dependent in general equilibrium. This may lead to ambiguous, even contradictory, interpretations of welfare results. To correct this problematic interpretational situation, we propose a normalization of the standard Konüs index using an endogenously determined price index. We also provide a simplified expression of the index for the special case of homothetic utilities, which is especially relevant given their widespread use in numerical general equilibrium.

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  • Guerra, Ana-Isabel & Manresa, Antonio & Sancho, Ferran, 2018. "The true index of cost of living under general equilibrium: The numéraire matters," Economics Letters, Elsevier, vol. 173(C), pages 69-72.
    • Handle: RePEc:eee:ecolet:v:173:y:2018:i:c:p:69-72
    DOI: 10.1016/j.econlet.2018.09.016
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    References listed on IDEAS

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    1. Brekke, Kjell Arne, 1997. "The numeraire matters in cost-benefit analysis," Journal of Public Economics, Elsevier, vol. 64(1), pages 117-123, April.
    2. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    3. Ana-Isabel Guerra & Ferran Sancho, 2017. "Compensating the Compensating Variation," UFAE and IAE Working Papers 961.17, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Patrick J. Kehoe & Timothy J. Kehoe, 1994. "A primer on static applied general equilibrium models," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 18(Spr), pages 2-16.
    5. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550, October.
    6. John B. Shoven & John Whalley, 1973. "General Equilibrium with Taxes: A Computational Procedure and an Existence Proof," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 40(4), pages 475-489.
    7. Shoven, John B & Whalley, John, 1984. "Applied General-Equilibrium Models of Taxation and International Trade: An Introduction and Survey," Journal of Economic Literature, American Economic Association, vol. 22(3), pages 1007-1051, September.
    8. ten Raa, Thijs, 2017. "Homothetic utility, Roy’s Lemma and consumer’s surplus," Economics Letters, Elsevier, vol. 161(C), pages 133-134.
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    Cited by:

    1. Manuel Alejandro Cardenete & M. Carmen Lima & Ferran Sancho, 2023. "A methodology to study price-quantity interactions in input-output modeling: an application to NextGenerationEU funds," UFAE and IAE Working Papers 973.23, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    2. Ferran Sancho, 2021. "The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 23(1), pages 93-107, January.

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    More about this item

    Keywords

    Konüs index; True cost of living; Welfare effects; General equilibrium;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • D60 - Microeconomics - - Welfare Economics - - - General

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