ON THE USE OF UNIT VALUE INDICES AS CONSUMER PRICE SUBINDICES

Abstract

Recently the interest into the calculation methods that are appropriate at the lowest level of aggregation of a Consumer Price Index (CPI) has increased. The International Conference on Price Indices, 31 October 2 November 1994, organized by Statistics Canada, was largely devoted to this topic. Diewert (1995) argues that at the lowest level of aggregation—that is the step before 'the first step' of Balk (1994)—the unit value and the total quantity sold constitute the appropriate price and quantity information. But what precisely is this lowest level? Diewert (1995) typically thinks of a 'homogeneous' commodity in a specific outlet, but it could also be a 'homogeneous' commodity in all outlets within a certain market area. He adds that the time period over which unit value and total quantity is calculated is important, by referring to the inflationary environment and the phenomenon of 'time of the day/week' commodities. An important question is thus: when is a commodity (group)—that is, a set of economic transactions—sufficiently 'homogeneous' to warrant the use of unit values? Do we need to restrict to 'homogeneous' commodities in order to use unit values? In this paper we will pursue whether theory provides guidance to these problems.

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