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Economic Approach

In: Price Index Numbers

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  • Naohito Abe

    (Hitotsubashi University)

Abstract

This chapter explores the economic approach to index numbers, specifically focusing on the cost-of-the living (COLI). This approach conceptualizes price indices based on utility levels and prices, differentiating from axiomatic and stochastic approaches which rely purely on price and quantity data. The chapter discusses the theoretical basis of the COLI, which measures the expenditure required to maintain a constant level of utility over time. It investigates the assumptions underlying the COLI, such as homothetic preferences, and the mathematical simplicity of computing the index through expenditure functions. However, it also addresses the practical challenges and limitations of applying COLI, especially the difficulty in estimating necessary economic parameters and adapting the model to real-world data where consumer preferences and conditions vary. The discussion highlights the need for robust economic models to accurately reflect consumer behaviours emphasizing the gap between theoretical ideal and practical application.

Suggested Citation

  • Naohito Abe, 2025. "Economic Approach," Springer Texts in Business and Economics, in: Price Index Numbers, chapter 0, pages 111-128, Springer.
    • Handle: RePEc:spr:sptchp:978-981-97-6305-4_5
    DOI: 10.1007/978-981-97-6305-4_5
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