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:
“There are theoretical reformers at all times, and all the world over, living on anticipation.”
—Henry David Thoreau (1817–1862)
“I believe that the mind can be permanently profaned by the habit of attending to trivial things, so that all our thoughts shall be tinged with triviality. Our very intellect shall be macadamized, as it were,—its foundation broken into fragments for the wheels of travel to roll over.”
—Henry David Thoreau (1817–1862)