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Substitution Bias in the Measurement of Import and Export Price Indices: Causes and Correction

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  • von Auer Ludwig

    (University of Trier, Fachbereich IV-Finanzwissenschaft, Universitaetsring 15, Trier, 54296, Germany.)

  • Shumskikh Alena

    (University of Trier, Fachbereich IV-Finanzwissenschaft, Universitaetsring 15, Trier, 54296, Germany.)

Abstract

The import and export price indices of an economy are usually compiled by some Laspeyres type index. It is well known that such an index formula is prone to substitution bias. Therefore, also the terms of trade (ratio of export and import price index) are likely to be distorted. The underlying substitution bias accumulates over time. The present article introduces a simple and transparent retroactive correction approach that addresses the source of the substitution bias and produces meaningful long-run time series of import and export price levels and, therefore, of the terms of trade. Furthermore, an empirical case study is conducted that demonstrates the efficacy and versatility of the correction approach.

Suggested Citation

  • von Auer Ludwig & Shumskikh Alena, 2022. "Substitution Bias in the Measurement of Import and Export Price Indices: Causes and Correction," Journal of Official Statistics, Sciendo, vol. 38(1), pages 107-126, March.
    • Handle: RePEc:vrs:offsta:v:38:y:2022:i:1:p:107-126:n:16
    DOI: 10.2478/jos-2022-0006
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    References listed on IDEAS

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    1. Ludwig von Auer & Alena Shumskikh, 2022. "Retrospective Computations of Price Index Numbers: Theory and Application," Research Papers in Economics 2022-01, University of Trier, Department of Economics.
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