Cost Avoidable See

Cost Avoidable See

Cost, Avoidable. See Supplementary Costs.

Cost of Living, the expense needed to maintain a standard of life. The prices of goods and services change over time for various reasons; it is therefore useful to investigate changes in the cost of buying the combination of goods and services typically bought by members of the group whose cost of living is being investigated. There is no single and constant measure of the cost of living for a whole community since the spending habits of individuals differ and change through time. Indexes of 'the' cost of living are therefore to be understood as more or less faithful measures of general trends in prices affecting a group of people. In the U.K. the official Index of Retail Prices is a measure of changes in prices of goods and services bought by wage-earners and earners of moderate salaries. Separate indexes would be needed to represent changes in the cost of living for either the poorer or the better-off sections of the community. Periodic inquiries into household expenditure by the Ministry of Labour reveal changes in spending habits so that measures of this type can be kept up to date as far as possible. Some wage rates vary with the Retail Price Index.

Constructing a cost of living index requires investigation into the expenditure of a representative sample of households belonging to the group whose cost of living is to be studied. It shows the expenditure on each commodity and each service within the period by the members of the group as a whole. When the importance of each good and service in the consumers' budget is known, the prices can be 'weighted' in the index so that a given price change in a more important commodity or service has more effect on the index than the same change in a less important commodity or service. Thus if consumers spend ten times more on bread than they do on cabbages, then if cabbages are assigned a 'weight' of one, bread is given a 'weight' of ten. The prices of the various commodities in the 'base-year' are taken as equal to 100.

Cost of living indexes become less -valuable over time if the weighting is not brought up to date because consumption habits change, and the weights given to commodities in the base year will cease to represent the importance of the items in the consumers' budget. In particular there is a tendency to shift expenditure towards things whose prices have fallen most or risen least. Over a long period consumption patterns may alter markedly, especially where new products, such as television sets, appear on the market, or rising incomes enable people to move from cheaper food like fish and chips to dearer food like smoked salmon, or developments in techniques of production cheapen prices and cause demand for formerly expensive products, like chicken, to expand. 9

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