OC COLI IS UNDER DEVELOPMENT
The Orange County Cost of Living Index, OC COLI (pronounced Oh See Coal Eye) is under development at Irvine Valley College by the students enrolled in the Econ10/Mgt10 Statistics for Business and Economics course taught by Martha Stuffler.
Students should expect to publish their research at the end of May 2007 with updates each subsequent December and May. The estimation model forming the basis of the OC COLI will be fully developed by the Econ10/Mgt10 students with Professor Stuffler providing oversight to the research project.
Using the demographic, social, and economic data specific to the Orange County population, students will define a market basket of goods and services purchased by the typical OC household to derive the index. The OC COLI will measure changes in the cost of living overtime using the year 2000 as the base year or comparison year for a representative household unit. A cost-of-living index measures differences in the price of goods and services, and allows for substitutions to other items as prices change. While a consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same region, consumer price indices are not true cost-of-living indices and should not be used for place-to-place comparisons.1
Methodology for the OC COLI will use a geometric mean formula similar to that used by the Bureau of Labor Statistics (BLS), U.S. Department of Labor, to derive the experimental CPI or CPIUXG. The current fixed-weight Laspeyres formula does not reflect the fact that consumers can and do change spending patterns as relative prices change. Therefore, under certain assumptions2, a measure of change in consumer prices that uses a geometric mean formula will successfully account for this consumer behavior. To the extent that those assumptions are accurate, the OC COLI using geometric means will provide a closer approximation to a cost-of-living index. The BLS currently is evaluating the full or partial adoption of the geometric mean formula in the CPI to reflect consumer substitution behavior.
1 Bureau of Labor Statistics, Glossary.
2 In mathematical terms, the geometric mean index equals the cost-of-living index if all elasticities of substitution in consumption between items equal minus one. The Laspeyres index exceeds the cost-of-living index unless all the elasticities of substitution equal zero.