Abstract
Mary Kokoski (2003) "Alternative Consumer Price Index
Aggregations: Plutocratic and Democratic Approaches."
Price indices are constructed to represent a population
by using a sample of household expenditure information as weights. This
expenditure information must be aggregated across households. In most cases,
including the U.S. Consumer Price Index (CPI), the aggregation method used
corresponds to a plutocratic index. Other types of aggregation, such as the
democratic index, are also possible, and, in terms of economic theory, equally
valid. In practice, the plutocratic approach is much more practicable, but it
may provide a different measure of price change than the democratic index.
This paper provides an empirical analysis of the
differences between the plutocratic and democratic price indices, using data
from the Consumer Expenditure Survey and the CPI for the periods 1987-1997,
and for simulated price change scenarios. The results show that there is very
little difference between the two types of index, and that one index need not
always exceed the other. In the simulated scenarios, even the extreme cases
where prices changed only for expenditure-inelastic goods and services, the
difference between the democratic and plutocratic indices was only about one
point for every ten percent increase in the relative prices of these goods.
Last Modified Date: July 19, 2008
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