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Measuring real value and inflation


  • Hillinger, Claude


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.

Suggested Citation

  • Hillinger, Claude, 2007. "Measuring real value and inflation," Discussion Papers in Economics 2090, University of Munich, Department of Economics.
  • Handle: RePEc:lmu:muenec:2090

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    References listed on IDEAS

    1. 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 (IfW), vol. 2, pages 1-70.
    2. Diewert, W E, 1976. "Harberger's Welfare Indicator and Revealed Preference Theory," American Economic Review, American Economic Association, vol. 66(1), pages 143-152, March.
    3. Claude Hillinger, 2001. "Money Metric, Consumer Surplus and Welfare Measurement," German Economic Review, Verein für Socialpolitik, vol. 2(2), pages 177-193, May.
    4. 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.
    5. 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 566-593, September.
    6. Bert M. Balk, 2005. "Divisia price and quantity indices: 80 years after," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 59(2), pages 119-158.
    7. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    8. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    9. Pollak, Robert A, 1980. "Group Cost-of-Living Indexes," American Economic Review, American Economic Association, vol. 70(2), pages 273-278, May.
    10. Hillinger Claude, 2003. "The Money Metric, Price and Quantity Aggregation and Welfare Measurement," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-36, July.
    11. James J. Rakowski, 1999. "Coping with a Paradoxical Theorem in Macroeconomics, Report on a Survey," The American Economist, Sage Publications, vol. 43(1), pages 52-56, March.
    12. Hillinger, Claude, 2007. "Measurement in Economics and Social Science," Discussion Papers in Economics 1928, University of Munich, Department of Economics.
    13. 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.
    14. Jorgenson, Dale W, 1990. "Aggregate Consumer Behavior and the Measurement of Social Welfare," Econometrica, Econometric Society, vol. 58(5), pages 1007-1040, September.
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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.

    More about this item


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

    JEL classification:

    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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