143:. Assuming that the cost function holds across time (i.e., people get the same amount of utility from one set of purchases in year as they would have buying the same set in a different year) leads to a "true cost of living index". The general form for Konüs's true cost-of-living index compares the consumer's cost function given the prices in one year with the consumer's cost function given the prices in a different year:
106:. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of
447:, compares the cost of what a consumer bought in one time period (q) with how much it would have cost to buy the same set of goods and services in a later period. Since the utility from q in the first year should be equal to the utility from q in the next year, Laspeyres gives the upper bound for the true cost-of-living index. Laspeyres only serves as an upper bound, because consumers could turn to
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uses the cost of a set of goods purchased in one time period with the cost it would have taken to buy the same set of goods in an earlier time period. It can be shown that the
Paasche is a lower bound for true cost of living index. Since upper and lower bounds of the true cost of living index can be
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The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual
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Utility is not directly measurable, so the true cost of living index only serves as a theoretical ideal, not a practical price index formula. However, more practical formulas can be evaluated based on their relationship to the true cost of living index. One of the most commonly used formulas for
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measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or
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In simpler terms, the true cost-of-living index is the cost of achieving a certain level of utility (or standard of living) in one year relative to the cost of achieving the same level the next year.
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The basis for the theory behind the cost-of-living index is attributed to
Russian economist A. A. Konüs. The theory assumes that consumers are optimizers and get as much
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for those goods that have gotten more expensive and achieved the same level of utility from q for a lower cost. In contrast, a
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as possible from the money that they have to spend. These assumptions can be shown to lead to a "consumer's cost function",
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found, respectively, through the
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is a type of cost-of-living index that uses an expenditure function such as one used in assessing expected
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There are many different methodologies that have been developed to approximate cost-of-living indexes. A
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can be defined as the utility received from a set of goods measured in quantity,
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over time or regions. It is an index that measures differences in the price of
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429:{\displaystyle P_{K}(p^{0},p^{1},q)={\frac {C(f(q),p^{1})}{C(f(q),p^{0})}}}
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262:{\displaystyle P_{K}(p^{0},p^{1},u)={\frac {C(u,p^{1})}{C(u,p^{0})}}}
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https://www.bls.gov/cpi/questions-and-answers.htm#Question9
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624:Categories
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487:Inflation
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121:utility
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521:May 5,
272:Since
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