Price index

“ The system becomes less arbitrary if we use, as the unit for measuring any goods, not the unit in which it is commonly sold, but the amount which constitutes a "dollar's worth" at some particular year called the base year. Then every price, in the base year, is one dollar, and therefore the average of all prices in that year is also one dollar. For any other year the average price (i.e. the average of the prices of the newly chosen units which in the base year were worth a dollar) will be the index number representing the price level, while the number of such units will be the volume of trade. ”

“ On the whole, the best form of index number is that expressing the price of a given bill of goods. If a definite assortment of goods cost $1.00 at one date and $1.10 at another date, these figures may be regarded as index
Fig. 2. Price Movements as Calculated by Using Different Numbers of Commodities (after Wesley Clair Mitchell)
Showing that the percentage rise or fall of the level of wholesale prices in the United States is very much the same whether many or few commodities are included in the calculations. ”

“ The Boskin Commission con­cluded in 1996 that the consumer price index overstates the actual rise in the cost of living by a percentage point a year. What’s more, the overall CPI has risen 40% faster than the cost of groceries since 1965. ”

“ We can, by index numbers based on these price statistics, translate from gold into commodities, but as yet we cannot translate from commodities into any ideal or absolute standard.
If I were treating of the problem of an ideal standard of value, I think I should be inclined to agree with Professor Marshall that a standard that represents a gradually descending scale of prices to keep pace with the "real" cheapening improvements in industrial processes is better than one which represents an absolute constancy of prices. ”

“ The measure of price change should 274 be the movement of the index number of prices of all the important commodities produced within the country—the index number to be so weighted as to give a defined importance (50 per cent. was suggested) to the prices of those classes of foodstuffs, clothing, housing accommodation, and other commodities upon which the wage earners spend a very great part of their income. ”

“ VIII.68 The legitimacy of separating the study of price levels from that of prices will be clearly recognized, when it is seen that individual prices cannot be fully determined by supply and demand, money cost of production, etc., without surreptitiously introducing the price level itself. We can scarcely overemphasize the fact that the "supply and demand" or the "cost of production" of goods in terms of money do not and cannot completely determine prices. Each phrase, fully expressed, already implies money. There is always hidden somewhere the assumption of a general price level. ”

“ Each "supply curve" or "demand curve" rests upon the unconscious assumption of a price level already existing. Although the curves relate to a commodity, they relate to it only as compared with money. A price is a ratio of exchange between the commodity and money. The money side of each exchange must never be forgotten nor the fact that money already stands in the mind of the purchaser for a general purchasing power. ”

“ It is amazing how tenaciously many people cling to the mistaken idea that an individual price, though expressed in money, may be determined wholly without reference to money. Others, more open-minded but almost equally confused, see the necessity of including the quantity of money among the causes determining prices, but in the careless spirit of eclecticism simply jumble it in with a miscellaneous collection of influences affecting prices, with no regard for their mutual relations. It should be clearly recognized that price levels must be studied independently of individual prices. ”

“ In considering the influence affecting individual prices we say that an increase in supply lowers prices, but an increase in demand raises them. But in considering the influences affecting price levels we enter upon an entirely different set of concepts, and must not confuse the proposition that an increase in the trade (the Q's) tends to lower the price level, with the proposition that an increase in supply tends to lower an individual price. Trade (the Q's) is not supply—in fact is no more to be associated with supply than with demand. ”

“ Our concern is with the magnitudes entering the equation of exchange, especially M, M', and V', for these are the immediate elements the variations in which affect the price level and cause it to rise and fall.
§ 18 XI.84 This chapter has been devoted to an historical study of changes in the quantity of currency and of the effects of these changes on prices. We have seen that, on the whole, increases in the amount of money have tended to raise prices from century to century during the last thousand years, and especially since the discovery of America. ”

“ They do so in terms of Price when measured by Money; they do so in the essentials of Value when measured by comparisons of commodities. As a rule, however, Money-prices are fair guides to Commodity values. Commodity values rise and fall according to cost of production, inclusive of delivery; and in so far as Money is stable, the rise and fall in prices is evidence of variations in production cost.
The relative rise and fall in Value, be it measured by prices in Money or otherwise, is so common a phenomenon of Trade that critics might be pardoned for denying a Value level. ”

“ If trade unions seek to raise prices of labor while trusts raise prices of commodities, the general level of everything may rise or fall; but it can rise only by a general decrease in the quantities of commodities, labor, etc., sold, or by an increase of currency, or by an increase in velocities of circulation. If there is neither an increase nor decrease in volume of business, and if the quantity and velocity of circulation of money and its substitutes remain unchanged, the price level cannot change. ”

“ The more of a particular commodity he has the lower his subjective valuation of a unit of that commodity; the more money he owns the lower his estimation of a dollar and the higher his subjective prices; and vice versa. Through a process of competition, selection, and adaptation, some of these subjective prices develop into market prices, that is, prices at which both buyer and seller benefit, and at which therefore an exchange takes place. To paraphrase an old adage, the proof of the market price is in the exchange. ”

“ With sellers, it is generally subjective-exchange-value, rather than marginal utility, that determines supply-price-offer. The sellers, in so far as they are producers, have little need for the great mass of their stocks. They will sell them, rather than keep them, at almost any price. The reason they ask high prices is simply that they think the market will give them the high prices. The individual price-offers, in the aggregate therefore, presuppose the whole market situation—presuppose a general value and price system already fixed and determined. ”

“ This assumption is never strictly true, and often is demonstrably false. The general price-level is neither a cause nor a result. Particular prices, in general, are results of two causes, namely, the value of money and the value of the good in question, and particular prices may then become causes, changing the quantity of money involved in a given set of exchanges. Neither quantity of money, nor quantity of goods exchanged, nor rapidity of circulation, nor general price-level is a simple, homogeneous quantity, obeying definite laws. ”

“ Some prices are fixed by law and custom, and some incomes are tied by long time contracts. Thus, it will happen, in many cases, that supply and demand for a given good will be unequally affected by a change in the value of money. This means that certain values are tied to the value of money, rising and falling with it, so that the amount of power which some elements in the economic situation are able to exert through supply-price-offer and demand-price-offer are at the mercy of changes in the value of money. ”

“ IV.13 The first cause of the unhealthy increase in trade lies in the fact that prices, like interest, lag behind their full adjustment and have to be pushed up, so to speak, by increased purchases. This is especially true in cases where the original impetus came from an increase in money. The surplus money is first expended at nearly the old price level, but its continued expenditure gradually raises prices. In the meantime the volume of purchases will be somewhat greater than it would have been had prices risen more promptly. ”

“ Whatever raises prices in one country tends to raise prices in all countries, and in the last analysis the only correct way to measure the relative importance of price-raising causes is to consider the world as a whole. If the statistics we have worked out for the United States were typical of the world, the resulting estimate of the relative importance of the four price-raising causes would be true of the world. But there is strong reason to believe that the growth of deposits and of their velocity played a far greater part in raising prices in the United States than anywhere else. ”

“ As we have seen, the real evils of changing price levels do not lie in these changes per se, but in the fact that they usually take us unawares. It has been shown that to be forewarned is to be forearmed, and that a foreknown change in price levels might be so taken into account in the rate of interest as to neutralize its evils. ”

“ If, however, it should be desired that prices should remain stationary, then this can be brought about only by finding for the standard an article that would automatically move in extent, and in the proper compensating direction, so as to meet any changes in value arising not only from causes affecting itself, but also from causes affecting labor and the vast number of goods that may be quoted in price. No commodity ever existed which could thus move in value. ”

“ In the case of all commodities which cannot be bought or sold at a common market place (or exchange) , price fluctuations are usually wide and frequent, because no large group ever has common knowledge of supply, demand and other factors that govern prices—purchases and sales are made direct between individuals, and knowledge of the amount asked or paid is restricted to a limited few. ”

“ So with the price level, while the strong-arm method is not only costly and vexatious but futile, the simple regulation of our instrument for measuring prices, the dollar, will accomplish the same result not only without cost and effort but, what is more to the point, with success. ”

“ If the demand for dollars increases faster than the number of dollars—as it did after 1800—the price of each dollar will rise and prices generally will fall. The relative value of the dollar may be changed by natural causes or by legislation. An increased supply—the demand remaining the same—or a decreased demand—the supply remaining the same—will reduce the exchangeable value of each dollar. Natural causes may act on both supply and demand; as, for instance, by increasing the product from the mines or by increasing the amount consumed in the arts. ”

“ It is necessary, however, to call attention to the fact that price always indicates an estimate of value in units of current money. If that money itself has a fluctuating value, the same article may have at different times different prices with the same value, or the same price with different values. Thus market prices in our country during and after the civil war, in which a paper currency gave the unit of prices, cannot safely be compared with each other, and can far less be compared with prices upon a specie basis. ”

“ While the price level is often sagging slowly when a revival begins, the cumulative expansion in the physical volume of trade presently stops the fall and starts a rise. For, when enterprises have in sight as much business as they can handle with their existing facilities of standard efficiency, they stand out for higher prices on additional orders. ”

“ A Visit of Santa Claus
Many people, after being forced to admit that an abundance or scarcity of money does, in some way, raise or lower the prices of other things, still remain somewhat mystified because they cannot trace the intermediate process by which money operates on the price of a given article. "How," they ask, "does the import of gold (or the issue of paper money or the creation of bank deposits) really affect the price my grocer charges me for butter? ”

“ Much of their reasoning goes no farther than to explain one price in terms of other prices. If we attempt to explain the money price of a finished product in terms of the money prices of its raw materials and other money costs of prices of production, it is clear that we merely shift the problem. We have still to explain these antecedent prices. ”

“ Wholesale prices fall faster than retail, the prices of producers' goods faster than those of consumers' goods, and the prices of raw materials faster than those of manufactured products. The prices of raw mineral products follow a more regular course than those of raw forest, farm, or animal products. As compared with general index numbers of commodity prices at wholesale, index numbers of wages and interest on long-time loans decline in less degree, while index numbers of discount rates and of stocks decline in greater degree. ”