On Measuring The True Cost of Living for the Developing Country: Case of Korea

Abstract

In a rapidly developing country without an adequate mortgage market, it is difficult to impute the cost of owning a home and, as a result, this cost is often omitted from the Consumer Price Index (CPI). To resolve this difficulty, by using an intertemporal consumption allocation model, this paper develops a method for deriving the user cost of owner-occupied housing which is in turn incorporated in the so-called True Cost of Living Index (TCLI). When applied to Korea as an example, the statistical results show substantially higher inflation than previously assumed, indicating the importance of homeownership cost in measuring the standard of living for a developing country. Thus, in both theory and practice, our TCLI based on the Diewert-superlative chain index is superior to the conventional fixed weight CPI, indicating its usefulness not just for Korea but also for other countries [C43, D11, O53]