Re: standard of living

["Per Gunnar Berglund" <pgb@xxxxxxxxxxxxxxxxxx>]

Comment on James R. Olson:

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James wrote:
>Consider the three options here.
1) I cannot afford my old bundle, therefore I am better off.
2) I cannot afford my old bundle, therefore my sitution is the same.
3) I cannot afford my old bundle, therefore I am worse off.
Am I correct in considering these to be the entire range of pertinent
statements on the matter at hand?
It strikes me that statement 3 is the only one that would be made by the
most people.<

Per:
Yes, and statement (3) is the only one which is being used in
index-construction, so there basically is no discrepancy between common
usage and index-construction.
What you are really driving at here, I guess, is the _timing_ problem: How
often should the bundle (or "basket") be re-weighted?
It would be plainly absurd to _never_ re-weigh the basket, since tastes do
in fact evolve over time, and old products are substituted by new products.
What the Boskin commission has (rightly) pointed out, is that the principle
of re-weighting the basket once every ten years is too conservative. (In
Sweden, for instance, it is re-weighted annually.)
Ideally, the basket should be re-weighted _continuously_, but of course in
an "ex post" sense so that the changes in prices are always accounted for
using the "ex ante" basket, and the basket is changed _subsequently_,
reflecting behavioural effects of the price changes. Mind there are no
"elasticities of substitution" involved here.

Best,
Per


Per Gunnar Berglund
Lilla Sallskapets vag 60
127 61  SKARHOLMEN
SWEDEN

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