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Path dependence of the general price level: A value theoretic analysis

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  • Utz‐Peter Reich

Abstract

The paper examines path dependence of price indexes, a problem that has become acute after international adoption of chain indexes for price and volume changes in the SNA93. Path dependence is an old issue of index numbers, and has been in the way of using chain indexes ever since their invention. The paper accepts chaining at its start, and tries to develop a sound deflation procedure from there. In this analysis path dependence is less an issue of appropriate formalization of a given concept, the traditional approach in index number theory, but rather a problem of developing an interpretation to a given and now worldwide recommended statistical practice. The key issue is found in the fact that money is not only the standard means of payment, concerning central banks, but also the standard of value in an economy, a feature that bears directly on the compilation of price indexes and national accounts. As a result, a chained weighted index is shown to be path independent, if it is interpreted as a change not of prices, but of the unit of account in which prices are expressed.

Suggested Citation

  • Utz‐Peter Reich, 2004. "Path dependence of the general price level: A value theoretic analysis," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 50(2), pages 229-242, June.
    • Handle: RePEc:bla:revinw:v:50:y:2004:i:2:p:229-242
    DOI: 10.1111/j.0034-6586.2004.00123.x
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