Cost of Living Index

By: EconomyWatch   Date: 13 October 2010

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The Cost of Living Index figures out the expense of a certain standard of living maintained over time. Basically it measures the changes of cost. If it rises over time, then it means that there is an inflation. It reflects the current price level of goods and services related to some base year.
Types of Indexes:
  • A Konüs Index uses an expenditure function such as, an expected compensating variation. To interpolate risk aversion into the cost of living, Konüs Index can be used.

  • Another kind of Cost Of Living Index is there that compares the cost of living across region instead of time. The region may comprise the metropolitan areas.


Interpretation of Cost of Living Index:
Cost of Living Index are determined to have a value of hundred in a base year to compare with the other values of that base year. If the index value exceeds hundred, it will be assumed that the cost of living is higher than that of the base year. Therefore, the result will have no unit.
Terms related with the Cost of Living Index:
Cost of Living Adjustment:
Cost of Living Index can contain employment contracts, other benefits, social security. So, by this idea of adjustment the above mentioned issues can be squared according to the changes in the Cost of Living Index, such as, salaries which can be adjusted yearly. Other issues regarding the change of salaries, e.g change of location, can also be included in the salary adjustment. Bonus may be offered to the relocated candidates.
Cost of Living Allowance:
Relocated candidates can further be compensated by stipend or bonus to adjust there. Such kind compensation is named as Cost of Living Allowance. There might be a number of employees who have been relocated permanently. For them, a basic salary adjustment will be organized.
Usefulness of the Cost of Living Index:
The uses of Cost of Living Index are:
  • By the Cost of Living Index one can consider the welfare changes caused by inflation or government policy.

  • It offers an unit free result.

Drawback:
It is quite arduous to measure the changes in the quality of goods.

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