Graph of the Week

Created: 2001-02-24
Last Modified: 20
01-02-24
Go to
Brad DeLong's Home Page

Teaching | Writing | Career | Politics | Book Reviews | Information Economy | Economists | Multimedia | Students | Fine Print | Other | My Jobs


New Estimates of CPI Bias

J. Bradford DeLong
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

February 2001


How Fast Have Living Standards Been Growing?: Evidence from Expenditure Shares

Source: Dora Costa, "AMERICAN LIVING STANDARDS, 1888-1994: EVIDENCE FROM CONSUMER EXPENDITURES" http://www.nber.org/papers/w7650

  • Engel's law tells us that as income goes up, the share of spending devoted to food goes down--and the share of spending devoted to recreation goes up.
  • We know at every point in time what the cross-sectional relationship between income and the food and recreation shares are.
  • We can use the cross-sectional relationship to read off how rapid "true" income growth is as expenditure shares change over time.
  • Dora Costa does this: she concludes that since the end of World War I the CPI has overstated the increase in the cost of living by about one percentage point per year.
  • That means that back in 1918 our predecessors were only half as well off as standard calculations based on nominal income and the official CPI would suggest.


Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

This document: http://www.j-bradford-delong.net/TotW/g20.html

Search This Website