Theoretical Foundation
The classical dichotomy is the assumption that there is a relatively clean distinction between overall increases or decreases in prices and underlying, “nominal” economic variables. Thus, if prices overall increase or decrease, it is assumed that this change can be decomposed as follows:
Given a set of goods and services, the total value of transactions in at time is
where
- represents the quantity of at time
- represents the prevailing price of at time
- represents the “real” price of at time
- is the price level at time
A price level is distinguished from a price index in that the existence of the former depends upon the classical dichotomy, while the latter is simply a computation, and many such will be possible regardless of whether they are meaningful.
Read more about this topic: Price Level
Famous quotes containing the words theoretical and/or foundation:
“Post-structuralism is among other things a kind of theoretical hangover from the failed uprising of ‘68Ma way of keeping the revolution warm at the level of language, blending the euphoric libertarianism of that moment with the stoical melancholia of its aftermath.”
—Terry Eagleton (b. 1943)
“The Bermudas are said to have been discovered by a Spanish ship of that name which was wrecked on them.... Yet at the very first planting of them with some sixty persons, in 1612, the first governor, the same year, “built and laid the foundation of eight or nine forts.” To be ready, one would say, to entertain the first ship’s company that should be next shipwrecked on to them.”
—Henry David Thoreau (1817–1862)