Using a price-dependent utility function to construct price indices

Uliyanov, Igor (2024): Using a price-dependent utility function to construct price indices.

Abstract

The purpose of this paper is to incorporate a price-dependent utility function into the theory of price indices. The results presented in the paper provide justification for incorporating relative prices into a consumption aggregate for solving the household’s optimization problem. Using a proposed CES aggregator, a simple model to approximate the conventional geometric price indices has been developed. The model provides the channels of convergence between the axiomatic, stochastic and economic approaches to index number theory. Numerical results based on data published by the Office for National Statistics are presented to confirm the validity of the model

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumption aggregator with price-dependent weights; Price index with price-dependent preferences
• Subjects: C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C43 - Index Numbers and Aggregation; E - Macroeconomics and Monetary Economics > E1 - General Aggregative Models > E12 - Keynes ; Keynesian ; Post-Keynesian; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation

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