Real Prices and Ideal Prices - Illustrations of Ideal Prices

Illustrations of Ideal Prices

• An example of an ideal price would be the value of annual Gross Domestic Product. This aggregate price is an ideal price, derived through an accounting procedure from statistical observations of financial reports, using principles of value equivalence and comparability, conserved/transferred value, value reduction, value increase and newly created value. Included in this ideal aggregate price are many estimated and imputed prices reflecting the assumed monetary value of products and services. But there exist no real traded goods or services, or group of traded goods and services, to which that aggregate price exactly corresponds. At best one could say, that this estimated aggregate price reflects a sum of money that "would buy" a certain group of products, assets and services, under specific assumed conditions. In other words, such a price does not correspond directly to real financial flows, but instead analytically groups components of those flows in order to make a valuation which corresponds to an economic concept, in this case value added.

• Another example would be an equilibrium price calculated by an economist. This is a price which a type of product or asset would theoretically have, if supply and demand were balanced. This price does not exist in actual trading processes except in special and rare cases; it is only an ideal or theoretical price level, which at best is only approximated in the real world.

• In accounting practice, ideal prices are used all the time. For example, when accountants have to value a stock of assets, or a set of transactions across an interval of time (for tax, commercial or audit purposes), they apply rules and criteria to arrive at a price reflecting the cost or market-value of the stock or flow of transactions. In grossing and netting, they apply certain rules of inclusion and exclusion to obtain the desired measure. But the valuation obtained following a standard procedure is in truth only hypothetical, because it represents a price which the assets or flows would have if they were traded or exchanged under assumed (stylized or standardized) conditions, or if they were replaced at a certain point in time. In principle, they need not refer to any real transaction flows at all, being only an imputation. Yet, the ideal price obtained may nevertheless influence a whole lot of transactions based on it, to the extent that it provides information and a measure of how a related market process is thought to be evolving.

• Ideal prices are often used in price negotiations, bidding, price estimation and insurance. These are calculated prices for things being traded, or the compensation which would be given, if certain conditions apply. Business deals can become very complex, and may involve numerous price assumptions. For example, the contract may be that if an average price trend occurs, then a certain amount of money will be paid out. Thus, the actual amount of money that changes hands may be conditional on a variety of price estimates.