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Measuring real value and inflation

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Author Info
Hillinger, Claude

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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 basically 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 of 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 assumption. 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 develop a unitary theory that can be used in all situations in which monetary measures have been used. The theory implies a uniquely optimal measure which turns out to be the Törnqvist index. I review, and partly re-interpret the derivations of this index in the literature and provide several new derivations. The paper also covers several related topics, particularly the presently unsatisfactory determination of the components of real GDP.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 2090.

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Date of creation: 16 Dec 2007
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Handle: RePEc:lmu:muenec:2090

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

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  1. Claude Hillinger, 2003. "The Money Metric, Price and Quantity Aggregation and Welfare Measurement," The B.E. Journal of Macroeconomics, Berkeley Electronic Press, vol. 0(1). [Downloadable!]
  2. Hillinger, Claude, 2008. "Science and Ideology in Economic, Political and Social Thought," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(2), pages 1-70. [Downloadable!]
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  3. Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-93, September. [Downloadable!] (restricted)
  4. Diewert, W E, 1976. "Harberger's Welfare Indicator and Revealed Preference Theory," American Economic Review, American Economic Association, vol. 66(1), pages 143-52, March. [Downloadable!] (restricted)
  5. Claude Hillinger, 2001. "Money Metric, Consumer Surplus and Welfare Measurement," German Economic Review, Blackwell Publishing, vol. 2(2), pages 177-193, 05. [Downloadable!] (restricted)
  6. Daniel T. Slesnick, 1998. "Empirical Approaches to the Measurement of Welfare," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 2108-2165, December. [Downloadable!] (restricted)
  7. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  8. Jorgenson, Dale W, 1990. "Aggregate Consumer Behavior and the Measurement of Social Welfare," Econometrica, Econometric Society, vol. 58(5), pages 1007-40, September. [Downloadable!] (restricted)
  9. Pollak, Robert A, 1980. "Group Cost-of-Living Indexes," American Economic Review, American Economic Association, vol. 70(2), pages 273-78, May. [Downloadable!] (restricted)
  10. Sefton & Weale, 2006. "The Concept of Income in a General Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 73(1), pages 219-249, 01. [Downloadable!] (restricted)
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