Substitution Bias in the Measurement of Import and Export Price Indices: Causes and Correction

Abstract The import and export price indices of an economy are usually compiled by some Laspeyres type index. It is well known that such index formula prone to substitution bias. Therefore, also the terms trade (ratio index) likely be distorted. underlying bias accumulates over time. present article introduces a simple transparent retroactive correction approach addresses source produces meaningful long-run time series levels and, therefore, trade. Furthermore, empirical case study conducted demonstrates efficacy versatility approach.