Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/192733 
Year of Publication: 
2013
Series/Report no.: 
Discussion Papers No. 751
Publisher: 
Statistics Norway, Research Department, Oslo
Abstract: 
The standard cost-of-living index hinges on the assumption that there is free trade. Applying it to situations where trade barriers are present yields biased results with respect to a true cost-of-living index. Import price indices are particularly vulnerable to this bias since many of the goods included in these indices are characterised by either explicit or implicit trade barriers. In this article I generalise the cost-of-living index to also allow for barriers to trade in the form of quantity constraints. Further, I develop an upper bound index to the true cost-of-living index when trade barriers are present. The upper bound index has an intuitive interpretation and it is easy to calculate. In the case of clothing imports to Norway the mean annual upper bound cost-of-living bias due to trade barriers is between 0.9 - 1.5 percentage points. It is also shown that average prices, which is often used in the literature, is not a measure of cost-of-living and the annual underestimation of how trade liberalisation has impacted inflation from using average prices was at least 0.8 percentage points.
Subjects: 
Index numbers
Cost-of-living
Price level
Trade barriers
JEL: 
C43
E31
F14
Document Type: 
Working Paper

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