Value and Profit by Whittington Geoffrey

Author:Whittington, Geoffrey
Language: eng
Format: epub
Publisher: Cambridge University Press
Published: 2017-08-07T04:00:00+00:00

This ‘atomistic’ approach was described as such by Frisch because it ignores the relationship between prices of commodities (pi) and the quantities consumed (qi) regarding them as two sets of independent variables. The other approach, labelled by Frisch as the ‘functional’ approach, is that adopted by economists and regards the relationship between prices and quantities as being one of interdependence. This approach is grounded in the concept of welfare, regarding goods as a means of creating utility for the individual consumer. The economist does not, therefore, attempt to measure the change in ‘the general level of prices’ as a uniquely defined objective concept but attempts to measure the change in ‘the cost of living’ defined by reference to the utility function which expresses the subjective preferences of the individual consumer. Thus, the basic approach used by the economist is to define a certain standard of living for the individual consumer (a ‘reference indifference curve’) and to calculate the cost of attaining this standard under different sets of prices. The ratio of this cost measured at various points in time to its level in the base period provides us with a cost of living index, reflecting how all price changes have affected the cost of living of the individual consumer.

The strength of the economist's approach is that it provides a precise rationale for and definition of ‘the cost of living’. It thus provides a framework within which the problems of index number construction can be identified precisely, which is a necessary prelude to understanding them. In particular, the problem of weighting different commodities is clarified: the appropriate weighting is the quantity of each commodity which would be consumed at the set of relative prices existing at the particular times being considered, at the reference standard of living. Thus, where n commodities are consumed, the ideal economic index is

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