Welfare Comparisons with Heterogeneous Prices, Consumption, and Preferences

The chapter provides an overview of the methods and techniques employed by economic statisticians in compiling measures of real expenditure for use in making temporal and spatial comparisons of economic welfare. The role of money-metric utility in making price and welfare comparisons is explored. Temporal measures of price change based on the Konus cost-of-living index and the associated measures of welfare change for individuals and groups of individuals are discussed. Links between the commonly used Laspeyres, Paasche, Fisher, and Tornqvist index numbers and the Konus index-based measures of price and real expenditure change are established. A section of the chapter is devoted to spatial price comparisons where heterogeneity in prices, consumption, and preferences poses challenges for statisticians. Multilateral index number methods based on the money-metric utility used in spatial and cross-country price and welfare comparisons including the Geary, Gini-Éltetö-Köves-Szulc, and spatial chaining methods are canvassed.