Exact and inexact decompositions of trade price indices

Abstract A reasonable concept for the true trade price index in situations where low-price countries capture market shares from high-price is average paid by importers same quality of good or service all exporting countries. However, decompositions indices are usually inexact sense that used as underlying aggregator formula not exactly reproduced. In this paper, we compare analytically exact and indices, paying particular attention to bias aggregate inflation occurring applying first-order Taylor series approximation quadratic lemma a geometric price. Our calculations, using Norwegian clothing industry an illustration, reveal over sample period 1997–2016 quite substantial much 0.6 percentage point some years. We therefore conclude should be practice reproduce formula.