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Measuring Real Value and Inflation

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  • Hillinger, Claude

Abstract

The most important economic measures are monetary. They have many different names, are derived in different theories and employ different formulas; yet, they all attempt to do the same thing: to separate a change in nominal value into a 'real part' due to the changes in quantities and an inflation due to the changes in prices. Examples are: real national product and its components, the GNP deflator, the CPI, various measures related to consumer surplus, as well as the large number of formulas for price and quantity indexes that have been proposed. The theories that have been developed to derive these measures are largely unsatisfactory. The axiomatic theory of indexes does not make clear which economic problem a particular formula can be used to solve. The economic theories are for the most part based on unrealistic assumptions. For example, the theory of the CPI is usually developed for a single consumer with homothetic preferences and then applied to a large aggregate of diverse consumers with non-homothetic preferences. In this paper I review both the general literature and my own past contributions in order to identify theories of measurement that are based on plausible economic assumptions. It turns out that all such theories lead to the Törnqvist price or quantity indexes. The paper also covers several related topics, particularly the presently unsatisfactory determination of the components of real GDP. I also propose a novel set of integrated accounts to measure changes in relative prices as well as the sectoral sources of inflation. --

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Bibliographic Info

Article provided by Kiel Institute for the World Economy in its journal Economics: The Open-Access, Open-Assessment E-Journal.

Volume (Year): 2 (2008)
Issue (Month): 20 ()
Pages: 1-26

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Handle: RePEc:zbw:ifweej:7333

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Keywords: Consumer price index; consumer surplus; money metric; price and quantity indexes; welfare measurement;

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References

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  1. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, American Economic Association, vol. 64(4), pages 566-93, September.
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  3. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(2), pages 117-136, Spring.
  4. Hillinger Claude, 2003. "The Money Metric, Price and Quantity Aggregation and Welfare Measurement," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 3(1), pages 1-36, July.
  5. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, Elsevier, vol. 4(2), pages 115-145, May.
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  7. Bert M. Balk, 2005. "Divisia price and quantity indices: 80 years after," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, Netherlands Society for Statistics and Operations Research, vol. 59(2), pages 119-158.
  8. Hillinger, Claude, 2006. "Science and Ideology in Economic, Political, and Social Thought," Discussion Papers in Economics, University of Munich, Department of Economics 1246, University of Munich, Department of Economics.
  9. J Sefton & M Weale, 2005. "The Concept of Income in a General Equilibrium," NajEcon Working Paper Reviews, www.najecon.org 122247000000000844, www.najecon.org.
  10. J. A. Sefton & M. R. Weale, 2006. "The Concept of Income in a General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 219-249.
  11. Diewert, W E, 1976. "Harberger's Welfare Indicator and Revealed Preference Theory," American Economic Review, American Economic Association, American Economic Association, vol. 66(1), pages 143-52, March.
  12. Jorgenson, Dale W, 1990. "Aggregate Consumer Behavior and the Measurement of Social Welfare," Econometrica, Econometric Society, Econometric Society, vol. 58(5), pages 1007-40, September.
  13. Hillinger, Claude, 2007. "Measurement in Economics and Social Science," Discussion Papers in Economics, University of Munich, Department of Economics 1928, University of Munich, Department of Economics.
  14. Claude Hillinger, 2001. "Money Metric, Consumer Surplus and Welfare Measurement," German Economic Review, Verein für Socialpolitik, Verein für Socialpolitik, vol. 2(2), pages 177-193, 05.
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Cited by:
  1. Claude Hillinger & Bernd Süssmuth & Marco Sunder, 2012. "The Quantity Theory of Money and Friedmanian Monetary Policy: An Empirical Investigation," CESifo Working Paper Series 3754, CESifo Group Munich.

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