A cost-of-living index is a theoretical price index that measures relative cost of living over time

or regions. It is an index that measures differences in the price of goods and services, and
allows for substitutions with other items as prices vary.

There are many different methodologies that have been developed to approximate cost-of-
living indexes. A Konüs index is a type of cost-of-living index that uses an expenditure function
such as one used in assessing expected compensating variation. The expected indirect utility is
equated in both periods.

The basis for the theory behind the cost-of-living index is attributed to Russian economist A. A.
Konüs. The theory assumes that consumers are optimizers and get as much utility as possible
from the money that they have to spend. These assumptions can be shown to lead to a
"consumer's cost function", C(u,p), the cost of achieving utility level u given a set of prices
Assuming that the cost function holds across time (i.e., people get the same amount of utility
from one set of purchases in year as they would have buying the same set in a different year)
leads to a "true cost of living index". The general form for Konüs's true cost-of-living index
compares the consumer's cost function given the prices in one year with the consumer's cost
function given the prices in a different year:

Since u can be defined as the utility received from a set of goods measured in quantity, q, u
can be replaced with f(q) to produce a version of the true cost of living index that is based on
price and quantities like most other price indices: