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P r i c e I n d ic e s: P a r t 4

This part explores the challenges and issues in measuring shelter in the Consumer Price Index (CPI). It discusses different concepts and indices used, such as user cost, rental equivalence, money outlays, net purchases, and the exclusion of owned accommodation. The democratic and plutocratic weighting approaches are also compared.

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P r i c e I n d ic e s: P a r t 4

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  1. Price Indices: Part 4 MEASUREMENT ECONOMICS ECON 4700

  2. This part… • Problems areas and issues for the CPI • The treatment of shelter • Plutocratic vs. Democratic weighting • The treatment of quality change

  3. Shelter in the CPI • Problem • Investment or consumption? • Shelter is an important expenditure • Shelter = 27% • Owned accommodation = 16%

  4. Shelter in the CPI • Six various measures are presented based on four different concepts • Statistics Canada’s Official Concept (user cost) • Rental equivalence • Money outlays (payments approach) • Net purchases (acquisitions approach)

  5. Shelter in the CPI • Official concept • Definition: Measures the price induced changes associated with the cost of owning and using a given stock of owner-occupied dwellings. Includes actual and imputed costs. • Advantages: • Covers elements similar to those that a landlord factors in when fixing rents.

  6. Shelter in the CPI • Rental equivalence • Definition: Imputes changes of market rents to the population of homeowners. • Advantages: • Consistent with the national accounts. • Isolates the consumption flow of owner-occupied housing from the savings flow.

  7. Shelter in the CPI • Money outlays (payments approach) • Definition: Measures price induced changes associated with the consumption related payments of owner-occupied housing. • MO 1: Excluding equity payment • MO 2: Including equity payment • Advantages: • Reflects actual costs to homeowners for their shelter. No imputation or notional amounts are involved. • Most of the population would identify their own home ownership experiences with this concept. • Escalator of money incomes

  8. Shelter in the CPI • Net purchases (acquisitions approach) • Definition: Measures changes in market (transaction) prices for owned accommodation (with or without mortgage interest charges). • = purchases of new and existing owner-occupied dwellings minus sales of such dwellings • “Net” purchases of existing dwellings is insignificant therefore net purchases = new purchases. • NP 1: Based on purchases • NP 2: Based on down payments and discounted mortgage payments (Alan Blinder, 1980) • Advantages: • Preferred measure for monitoring inflation and for monetary policy.

  9. Shelter in the CPI • No owned accommodation • Definition: Simply exclude homeownership from the CPI. Housing is an purely a financial asset. • Advantages: • Easy solution and compatible with the current HICP and other country practices.

  10. Shelter in the CPI

  11. Shelter in the CPI

  12. Price Index Series for Owned Accommodation (January 2000 = 100)

  13. Price Index Series for All items using NHPI (January 2000 = 100)

  14. Shelter

  15. The NHPI

  16. Democratic vs. Plutocratic • Democratic: An index in which each household index is given equal weight • Plutocratic: A price index in which all dollars of expenditure are treated equally, so that, implicitly, each household is weighted proportional to its expenditures.

  17. Democratic vs. Plutocratic

  18. Democratic vs. Plutocratic

  19. Democratic vs. Plutocratic

  20. Democratic vs. Plutocratic

  21. Democratic vs. Plutocratic

  22. Democratic vs. Plutocratic • The last equation tells us that you a democratic Laspeyres price index can be estimated if we can calculate, in addition to the price relatives, the population average of the household budget shares. • The merits of the democratic index which gives every household an equal weight in the CPI are ideal for welfare analysis and income indexation. • If you want every dollar to count the same (e.g., deflation in national accounts), then you are better off with a plutocratic index.

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