Theory and measurement of economic externalities 1st edition. Statistics measured using some type of index number include, inflation. Theory and an empirical application to the us bell system, structural change and economic dynamics, elsevier, vol. For example, if a commodity costs twice as much in 1970 as it did in 1960, its index number would be 200 relative to 1960. Bilateral indexes and some early tests in this chapter, our goal will be to assume that the bilateral price index formula, pp0,p1,q0,q1, satisfies a sufficient number of reasonable tests or properties so that the functional form for p is.
Theory and measurement of economic externalities sciencedirect. As is well known1, there are three distinct approaches to the measurement of gross domestic product. Measurement of productivity and efficiency by robin c. The economic theory of index numbers and the measurement. Theory and measurement of economic externalities provides information on some analytical and empirical developments in the field of externalities. Similar results are given for making cost of living comparisons under general structures of consumer preferences. It is a systematic treatment of four relatively new methodologies in efficiencyproduction analysis. The tornqvist productivity index, corrected by a scale factor, is shown to equal the mean of two malmquist productivity indexes. An introduction to efficiency and productivity analysis is designed as a primer for anyone seeking an authoritative introduction to efficiency and productivity analysis.
The base usually equals 100 and the index number is usually expressed as 100 times the ratio to the base value. Feb 14, 2018 an index based on the geometric mean formula will be closer to a coli than will a laspeyres index. Economic theory and the measurement of concentration tibor scitovsky stanford university economic theory might contribute in two possible ways to the development of a satisfactory measure or set of measures of concentration. Fishers 1911 and 1922 books address this functional form issue using the test.
Sep 08, 2018 the nice thing about index numbers is they can be modified to any unit of measurement. Economic theory and the measurement of concentration. Index numbers in economics explained economics tutor2u. A vast majority of the existing theory concerning price indexes con. The economic theory of index numbers and the measurement of input, output, and productivity article pdf available in econometrica 506. Introduction producer price indexes provide price indexes to deflate parts of the system of national accounts. The paper also considers multilateral index number theory where it is. An index number is an economic data figure reflecting price or quantity compared with a standard or base value. Allen the first statement of the economic theory of price index numbers seems to have been that contained in the chapter on the measurement of the national dividend in professor pigous wealth and welfare i912. The book thoroughly covers theory index numbers, axiomatic production theory, dea, fdh, stochastic models, inference and practice of measurement of efficiency and productivity, including issues and sources of data with links, as well as links to software and models. Introduction to index number theory for price and productivity measurement. View citations in econpapers 840 track citations by rss feed downloads. Erwin diewert this paper develops index number procedures for making comparisons under very general circumstances.
There is a substantial body of economic analysis concerning the construction of index numbers, desirable properties of index numbers and the relationship between index numbers and economic theory. Index numbers, index numbers statistics, index numbers economics. Recent developments in consumer price index theory 1. Economists can apply indexing methods to prices, incomes, production, employment and. Economic statistics this is a wikipedia book, a collection of wikipedia articles that can be easily saved, imported by an external electronic rendering service, and ordered as a printed book. Index numbers are relative measurement of group of data.
The economic theory of index numbers and the measurement of input, output, and productivity. Bilateral indexes and some early tests in this chapter, our goal will be to assume that the bilateral price index formula, pp0,p1,q0,q1, satisfies a sufficient number of reasonable tests or. Hence, it is a complex problem to answer about the measuring of economic development. Index numbers are a useful way of expressing economic data time series and comparing contrasting information. The text begins with an elementary survey of the indexnumber problem before turning to more detailed treatments of the theory and practice of index numbers. A development of the economic theory of price index numbers. A price index is a normalized average typically a weighted average of price relatives for a. Most cpis and employment cost indices from statistics canada, the u.
Basically, capital input cost is measured as the difference between the book. Eurostat and the world bank 2004, consumer price index manual. Low per capita incomes are an important feature of economic underdevelopment perhaps the most important feature and there is little doubt that the distribution of income across the worlds nations is extraordinarily skewed. Index numberseconomists frequently use index numbers when making comparisons over time. In the economic theory of the output price index, qt is assumed to be the solution to a revenue maximization problem involving the output price vector pt. In fact, it is typical statistical agency practice to pick a basket that pertains to an entire year or. Basic index number theory international monetary fund. Pdf irving fisher and index number theory researchgate. Introduction there have been some important new developments in consumer price index theory during the past few years. There are many kinds of index numbers, including price. This book presents the function of turning out producers goods in the form of better knowledge, analytical formulation, and approaches for application to current problems.
In simple terms, an index or index number is a number displaying the level of a variable relative to its level set equal to 100 in a. An index starts in a given year, the base year, at an index number of 100. Broad trends can often be discerned with tools that do not live up to full theoretical standards as long as they are interpreted with the necessary caution. Introduction to index number class 11 notes economics. Formal index number theory is not needed for measurement when the definition of a measure is obvious and its properties are apparent.
In the absence of a consensus theory of economic development, consistent measurement was dif ficult. Index numbers, index numbers statistics, index numbers. A number indicating change in magnitude, as of price, wage, employment, or production shifts, relative to the magnitude at a specified point usually. Allen meets this need in simple and consistent terms and with comprehensive coverage. On the theory of industrial price measurement output price. Economists can apply indexing methods to prices, incomes, production, employment and unemployment, net. The topics range from the equation of measurement, a functional equation which plays an important role in the subject, through various approaches to price, efficiency, inequality and tax progression measurement to results on consistency, efficiency and separability in aggregation, productivity measurement, cost functions, allocation. Index numbers are important in economic statistics.
The answer to the question what is the mean of a given set of magnitudes cannot in general be found, unless there is given also the object for the sake of which a mean value is required. Frisch 1936 distinguishes three approaches to index number theory. Index numbers measure the value of an item or group of items at a particular point in time, as a percentage of the value of an item or group of items at another point in time. Basic index number theory 371 approaches are also possible. A discrete variable is the one whose outcomes are measured in fixed numbers. Measurement in economics theory and applications of. Though there are several criteria or principles to measure the economic development, yet none provides a satisfactory and universally acceptable index of economic development. In subsequent years, percentage increases push the index number above 100, and percentage decreases push the figure below 100. It is a number which represents the average price of a group of commodities at a particular time in relation to the average price. Two essays on the effects of taste, quality, and technological change is concerned with the effects of consumer taste, product quality, and technological change on price indices. The theory of price and general competitive strategy under conditions of oligopoly might provide guidance for choosing the. Index numbers offer a precise measurement of the quantitative change in the concerned variables over time. The index numbers for 1909 and 1910 each calculated in terms of 18671877 are compared with each other.
Given the importance attached to index numbers in tfp measurement, it is hardly surprising that economic theory is extremely relevant in understanding what these index numbers actually measure and in making a proper application of the formulae described. Department of economics, the university of british columbia and the school. Mar 17, 2018 index numbers are relative measurement of group of data. We feel that it is important to base index numbers upon well understood economic theory. Instead of choosing the basket of period 0 or 1 or an average of these two baskets, it is possible to choose a basket that pertains to an entirely different period, say, period b. Index numbers in economic theory and practice isbn. Pdf there are four main approaches to bilateral index number theory. An index number is a statistical derives to measure changes in the value of money.
King has defined statistics in a wider context, the science of statistics is the method of judging collective, natural or social phenomena from the results obtained by the analysis or. Finest in the sense that it enables measurements to the maximum degree of precision. The cobbdouglas regression and the measurement of economic growth and its causes jeff biddle dept. For help with downloading a wikipedia page as a pdf, see help. The text begins with an elementary survey of the index number problem before turning to more detailed treatments of the theory and practice of index numbers. Desirable properties have to be assessed against the reality of data availability or the costs of producing statistics.
Price index formulas can be evaluated based on their relation to economic. Statistics is the science of estimates and probabilities. The axiomatic approach to bilateral index number theory 1. Measurement of economic development economics discussion. An index number is a figure reflecting price or quantity compared with a base value. During the 1970s, in fact, the neoclassical paradigm itself was called into question arndt 1987.
Index numbers, economics working papers diewert070103081723, vancouver school of economics. Index number theory and measurement economics by w. Generally, economic development is a process of change over a long period of time. The index number is then expressed as 100 times the ratio to the base value. The economic theory of index numbers and the measurement of. Index numbers are expressed in terms of percentages. The cobbdouglas regression and the measurement of economic. Introduction in this chapter1, the merits of using the chain system for constructing price indexes in the. Index numbers theory and the practice of compiling economic statistics such as. They are commonly used in business and economics as indicators of changing business or economic activity. I use the phrase cobbdouglas regression to describe the empirical procedure of regressing a measure.
In this chapter, we will outline many of these new. Dynamic factor demand models, productivity measurement, and rates of return. Douglas w caves, laurits r christensen and walter diewert. Index number facilitates the comparative study over different time period. The literature on index numbers is so vast that we can cover only a small fraction of it in this chapter. Special attention is paid on technological change in the simple twosector production model of rybczynski and uzawa. An introduction to efficiency and productivity analysis. Using the standard and innovative formulations of the theory and practice of ef. The production approach 2 to the calculation of nominal gdp involves calculating the value of outputs produced by an industry and subtracting the value of. The nice thing about index numbers is they can be modified to any unit of measurement. These numbers are values stated as a percentage of a single base figure.
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