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The IUP Journal of Applied Economics
Estimating Consumer Price Indices Through Engel Curve and Linear Expenditure System: An Exploratory Note
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This paper proposes a method of estimating spatial bilateral price index numbers from cross-section consumer expenditure data on different items using Engel curve analysis. A simple technique is developed by which it is possible to find a method for estimating a set of consumer price index numbers for a group of consumer expenditure items (both goods and services) for which only expenditure data are available. The main assumption of this technique is that the Linear Expenditure System (LES) is the correct and actual description of the complete demand system of the particular population of which we are interested to find the price index. The usefulness of the procedure is that it overcomes the problem of data inadequacy, a problem that is still prevalent in various databases, especially in the developing countries and it is easy to implement. To illustrate the method, ICRISAT VDSA database (which is in the public domain) of consumer expenditure is used and the spatial consumer price index number for non-food group for four villages of Andhra Pradesh is calculated for four years with one particular village taken as the base. The main limitation of the method is that violation of LES assumption can lead to inconsistent results.

 
 
 

Appropriate consumer price index numbers are required for comparing patterns of consumption or income levels over time for a given region or across regions or population groups for a given time period. When the comparison is based on price or income levels there are usually two approaches to construct price index numbers. The easiest approach is to use a set of binary price index numbers and compare pairwise (e.g., Sen, 1976; Bhattacharya et al., 1980; Coondoo and Saha, 1990; and Deaton, 2003). The second approach is to construct Purchasing Power Parities (PPPs), which are multilateral price index numbers, constructed on the basis of a set of price and quantity data for a common set of commodities (see Geary, 1958; Khamis, 1972; Balk, 1996; Hill, 1997; and Neary, 2004). As in the case of binary price index numbers, computation of a set of PPPs requires price and quantity data of commodities having uniform quality, which is often rather difficult to obtain.

It is often found in the consumer expenditure databases that reliable price and quantity data are unavailable or of poor quality. Moreover there are items of expenditure like ‘mobile phone bills,’ and ‘eating in tea stalls/dhabas’ for which only expenditure data are available and separate quantity and price are not supplied. In such a situation construction of reliable price index numbers becomes difficult. To overcome this problem, Coondoo et al. (2011) propose a procedure for estimating regional consumer price index numbers based on the estimation of item-specific region-wise Engel curves. Given the problem of data inadequacy in developing countries, the question they attempt to answer is whether it is possible to find a method of estimation of a set of spatial consumer price index numbers using Engel curves that does not require data either (i) at the household level, or (ii) on prices/unit values of goods and services consumed.

In this note, we address a related but different question. Suppose we have a consumer expenditure database in which there are some groups of items for which price and quantity data are available for a number of households (e.g., food items like cereals, pulses, milk, etc.). However for the same set of household, for some other groups of items only expenditure data are available (e.g., non-food items like ‘medical expenses’ or ‘fuel and light’).1 Now, is it possible to find a method for estimating a set of spatial consumer price index numbers for all groups of consumer expenditure items (both goods and services) for some of which only expenditure data are available? Our proposed methodology relies on the Engel curve and the Linear Expenditure System (LES), in line with the Coondoo et al.’s (2011) methodology.

 
 
 

Applied Economics Jouranl, Linear Expenditure System (LES) ,Estimating Consumer Price Indices , Through Engel Curve.