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:
“The desire to serve the common good must without fail be a requisite of the soul, a necessity for personal happiness; if it issues not from there, but from theoretical or other considerations, it is not at all the same thing.”
—Anton Pavlovich Chekhov (18601904)
“The most excellent and divine counsel, the best and most profitable advertisement of all others, but the least practised, is to study and learn how to know ourselves. This is the foundation of wisdom and the highway to whatever is good.... God, Nature, the wise, the world, preach man, exhort him both by word and deed to the study of himself.”
—Pierre Charron (15411603)