Rise In Price Level Research Articles

On the calculation of ‘real’ investment returns

1. The rise in the general level of prices that has occurred in Britain at varying speeds over the last half century has caused many investments to appreciate considerably in money terms, but without this necessarily representing any increase in the purchasing power of the monetary proceeds. It has for some time been desirable to adjust for changes in the general purchasing power of money, and to calculate returns on investment ‘in real terms’. The issue by the British Government of Index Linked Treasury Stocks provides investments whose future return is defined in terms of the Retail Prices Index (R.P.I.), and it is desirable to calculate ‘real’ redemption yields on these stocks. There has been some discussion about how such real yields should be calculated, and, as will be seen, it is necessary to make certain assumptions in order to produce explicit results. The Joint Investment and Index Committee of the Institute of Actuaries and the Faculty of Actuaries has asked me to prepare this note in order to explain the details of how real yields should be calculated, and what assumptions need to be made and stated. I am very grateful to the members of the Committee, particularly the Chairman, R. H. Pain, for their assistance in its preparation.

Examining the Recent Behavior of Inflation

R. W. Hafer explains that the recent decline in inflation is the result of declining relative prices of energy and food and a concomitant drop in the trend rate of transactions money growth. Hafer notes that inflation, a persistent rise in the general level of prices, is related directly to the average long-run rate of money growth.

Earnings, Prices, and Lives

The people's money income, retail commodity prices, and the people's standard of living are intimately related. If retail prices of commodities remain unchanged, the more money the inhabitants earn, the higher the living standard becomes. This is a kind of positive relationship. However, if the money earned remains constant the general price level and people's living standard are negatively related. A rise in price level means a lowering of the living standard; a lowering of price level, on the other hand, means a rise in the living standard. People usually lack an overall perspective and correct understanding of these complex relationships, and they tend to have one-sided views. They may overlook the increase in earnings, which raises the living standard, and assert that the living standard is lower because prices of some commodities rose. Or they may ignore the impact of a price rise on real-income standard of living when their earnings increase and claim that their living standard has risen. These two one-sided views are now present in the real-life situation, but the first is more prevalent; it needs to be analyzed.

Effects of Inflation on Financial Markets and Agricultural Lending Institutions

Inflation, one of the most misused words in the English language, is defined here as a continuing rise in the average level of prices for real goods and services. The following price changes thus do not constitute inflation: (a) a price increase for an individual good or service, (b) a once-and-for-all increase in the average level of prices, and (c) a temporary increase in the average level of prices. For example, a price increase for an individual good may affect the average price level. But by itself, this price increase is not inflationary since it is self-limiting; either producers will increase their production and hence drive the price down or else consumers will substitute for other goods in response to the higher price. Inflation of the steady pace variety which can be forecasted with little or no error will have one set of effects on an economy. Inflation of the fits and starts variety which cannot be forecasted with a reasonably low error will have another set of effects. The generalization that inflation transfers wealth from

The Quality Bias in Price Indices

One of our seemingly accepted conventional wisdoms is not fact, but at best hypothesis of questionable validity, supported essen? tially by intuition, and having only tentative empirical basis. The belief concerns nature of quality change and its bearing upon price indices. The conventional wisdom is replete in textbooks. Sichel and Eckstein, example, state that a price index, often ignores im? portant improvements in quality ... [p. 259] Reynolds holds that quality changes usually for [p. 122] and that to extent that such improvements are not allowed in our prices indexes, rise in price level is overstated . [p. 123] One inter? mediate text maintains that the usual measures of price level change tend to overstate price increases [Chambers, Scott, and Smith, p. 282] due to improved qualities. Dolan, in his recent addition to prin? ciples market, affirms that there is upward bias in price indices due to quality change, but notes that magnitude of bias cannot be de? termined, [p. 96] The texts by Baird [1973, p. 27], Miller [p. 152], Glahe [p. 12], Campbell and Campbell [p. 325] and several others1 suggest that quality change is better, but is ignored in price indices, claiming such measures contain an upward bias that exag? gerates price trends. [Campbell and Campbell, p. 325] A frequent illustration depicts rising cost of medical care and asks reader if it is justified to compare $2.00 office call of 1939 to 412.00 office call today ? [Glahe, p. 12]2 It is to be noted that there few texts which maintain that

Interest rates, expectations, and the Wicksellian policy rule

Prominent among older theories of inflation is the view that a rising price level stems from a divergence between two rates of interest.

Interest Rates, Expectations, and the Wicksellian Policy Rule

Prominent among older theories of inflation is the view that a rising price level stems from a divergence between two rates of interest.

Inflation, Unemployment, and Hayek

a,N TFIESE times of high unemployment and rising price levels, one looks to the leaders of the economics profession for analysis and solutions. One possible candidate, \vho has investigated these problems in detail, is Friedrich August von Hayek. Hayek was awarded a share of the Nobel Prize for Economics last autumn. Born in 1899 in Austria, Hayek is probably better known in Europe than in the United States. After spending his formative years studying economics and law in Austria, he moved to England in 1931 and then on to the University of Chicago in 1950. Hayek accepted a chair at the University of Freiburg in Germany in 1962. Several years later he returned to Austria, where he now lives.

Price Stability and Monetary Expansion: An Impirical Study

The objective of this paper is to explain and quantify the phenomenon of the rising price level and to indicate the rate of expansion in money supply given the rates of growth in agriculture and industrial production and the velocity of circulation of money supply such that price-stability is maintained. The analysis has been done on long-term basis so that a deeper insight may be had of the problem of rising prices.

ملاحظة حول التضخم النقدي في ليبيا

Inflation defined as a continuous rise in the general price level should be distinguished from seasonal variation in the price level and changes in the relative prices of commodities whatever the reason for this change may be. The rise in prices of goods and services during inflation is not restricted to goods and servies produced locally but also extends to goods and services crossing the national frontiers due to a rise in the foreign exchange rate if the country in question is adopting a free and fluctuating exchange rate or due to difficulties in its balance of payment if it adheres to fixed exchange rate. There is dearth of statistical figures as far as price indeces are concerned in Libya and the figures that are available do not indicate a sharp rise in the local prices ; thus while the quantity of money in circulation has risen by eleven times from 1957 to 1967, the retail price index of the principal food commadities has risen by about 63%. The wide discrepency between the rise in quantity of money & the reported figures on price indeces, I believe is due to the following factors : (1) The rise in income has induced a rise in the quantity of money held by the private sector, i.e. a fall in the income velocity of circulation of money ; (2) The rise in the quantity of money during this period was due to a favorable balance on the capital and current account of the balance of payment and not due to local credit expansion or the printing press method of increase_ions that ing the supply of money. The country has never used locall.. the capital resources available to it; (3) part of the increas quantity of money may have been used to finance transactions were financed previously on a barter basis. The rise in the general price level is an accepted fact as far as the average person in the country is concerned ; however there is no reason to infere that this rise constitute more than a case of disquilibrum in the market due to shift in the demand function brought about primarily by a rise in the real income. The rise in the real income itself was a result of growth in the production of goods and services that is not directly suitable for consumption ; thus the relative inelasticity of the supply of the various consumer products caused a rise in the general price level in the country, but had the rise in the real income been the result of a rise in the supply of consumption goods, prices would have remained relatively stable. In a market economy every supply is elastic in the long run, therefore sooner or later the aggregate supply of goods and services will respond to the increase in demand and the rise in prices will find a limit providing that the monetary and fiseal authorities are not behaving in a manner that will produce a deficit on the balance of payment and there by causing a deterioration in the position of the Libyan pound. A rise in the price level such as happened in Libya is necessary in order to allow the market forces to get momentum and reestablish equilibruim again.

Notes on Development in Iran

The problems accompanying a large-scale development program are frequently most glaringly reflected in severe balance of payments pressure and in a rapidly rising price level. From such a reflection it is easy to jump to the conclusion that the basic need of the developing countries is simply more foreign exchange and more internal savings. And much of the literature and policy recommendations prepared in the developing countries--and elsewhere--concentrate attention on the problems of increasing domestic capital formation and of increasing the availability of foreign exchange. In light of this emphasis it is instructive to examine the development process in a country where special circumstances have resulted in an unusually high rate of savings and an unusually high rate of foreign exchange earnings. Iran is such a country. Since 1954 when the petroleum and political difficulties were resolved, Iran has received, through oil exports and foreign loans, quantities of foreign exchange greatly in excess of that available to most countries with comparable levels of output. Similarly, the particular arrangements of the sharing of the oil revenues have contributed to a rate of savings well in excess of that expected in a nation with a per capita income of, at most, $150 per year.

Excise-Tax Shifting and Incidence: A Money-Flows Approach

T HE money-flows analysis reported in this paper grew out of attempts to cope with one of most intractable obstacles in path of theory of excise-tax shifting and incidence, namely, problem of distinguishing between fiscal and monetary effects on market prices. The conventional expedient for coping with this obstacle is to try to avoid it by impounding monetary conditions in ceteris paribus while imposing an excise tax. Although this conventional expedient may be useful for certain analytical purposes, it is no real solution of problem. Price effects of impounded monetary conditions always return, like proverbial drowned cat, to plague excise-tax theorist. Even Harry Gunnison Brown, whose pioneering analysis of of a general output or sales tax is best of three significant articles examined in this paper, was not quite able in two attempts to distinguish between price effects of his tax and those of his assumed constant quantity of money in circulation.2 Direct assaults on this intractable monetary obstacle have recently been attempted by two writers. Earl R. Rolph located crux of this problem in question: If excise taxes raise prices to consumers, what shall be done about monetary theories which hold that an increase in aggregate demand is a necessary condition for a rise in general level of prices?3 His proposed solution was to convert quantity theory of money into a tool for excise-tax theory by means of his income effect. This paper will demonstrate that Rolph's assault on monetary obstacle failed because he falsely equated monetary deflation with backward shifting of excise taxes. Still more recently, Richard A. Musgrave diagnosed this problem as simply an aspect of distinction between absolute and relative prices. As shown above, he asserted, incidence depends on changes in relative price, and these are independent of change in absolute prices or price levels.4 Musgrave's proposed solution was to relegate changes in absolute prices and in price level to domain of the money supply and to reserve tax-induced changes in relative prices as hunting ground for an independent theory of incidence. ' I am greatly indebted to Mr. Roland N. McKean and Professors Howard S. Ellis, Bernard F. Haley, Milton Friedman, and James M. Buchanan for their helpful criticisms and suggestions at various stages in preparation of this paper.

A Proposed Revision of Excise-tax Theory

E doctrine that consumers can and do pay excise taxes has lived I a long life; it is among the more ancient opinions held by both professional and lay groups about economic affairs. The theory has successfully survived revolutions which have torn other segments of economic thinking to tatters. So strongly is it intrenched that the few assaults made on it have been scarcely noticed. Yet the theory has highly vulnerable aspects of a rather obvious character. If excise taxes raise prices to consumers, what shall be done about monetary theories which hold that an increase in aggregate demand is a necessary condition for a rise in the general level of prices? Since, in fact, any tax which has a yield takes money out of private hands, a mind not beclouded with accepted tax theories might conclude that such taxes, by reducing aggregate demand, should lower rather than raise prices. Yet we solemnly explain that excise taxes are deflationary because they raise prices, that is, because they are inflationary.2 The following analysis attempts to revamp the theory of excise taxation to provide an integrated theory applicable to any system of excise taxes, ranging from a tax on a single commodity at one xtreme to a system of taxes levied on every commodity produced at a uniform ad valorem rate at the other extreme. The theory differs in a number of respects from the usual explanations offered for the effects of excise taxes. Perhaps the most startling is the finding that, at least for the case of competitive pricing of products and of resource services, excise taxes are not shifted to consumers. We find this doctrine to be an unfortunate by-product of partial equilibrium theory. In place of this and other views, the following main conclusions are reached: (i) A system of completely general and uniform taxes leaves the composition of output unchanged, does not raise product prices, and reduces the money incomes of resource owners and does so proportionately. (2) Any partial system of excise taxes, including the case of a system restricted to a tax on one commodity, alters the product-mix, raises the prices of heavily taxed items, lowers the prices of lightly taxed and nontaxed items, and reduces the money incomes of certain resource owners. (3) All systems of excise taxes are deflationary with respect to private demands for products, not because they are inflationary (i.e., raise prices), but because they make private money incomes lower than they would otherwise be. The absence of any satisfactory explanation as to why excise taxes reduce people's money expenditures has been a serious weakness in prevailing views. II am indebted to my colleagues, Robert Dorfman, George F. Break, William Fellner, and Howard S. Ellis, for helpful suggestions in connection with this study.

County and Township Government in 1947

Rural local government received considerable attention during 1947 at the hands of state legislatures and the general public. The legislative sessions in many states were the first regular meetings since the end of the war, and therefore afforded the earliest opportunity to deal at length with various postwar problems and with certain problems of a peacetime nature on which action had been deferred during the war period. Perhaps the most significant phase of the year's developments was the conferring upon counties and townships, or special districts serving unincorporated areas, of numerous powers of a regulatory or service nature traditionally possessed only by municipalities. Another subject which received major attention was that of finding new and increased revenues to finance expanded programs of local services at rising price levels. Widespread interest was also displayed in such matters as areal readjustments, the modernization of local-government structure in the interest of efficiency and economy, and intergovernmental coöperation in the performance of local functions. In reviewing the events of the year, a topical arrangement similar to that used in previous summaries will be followed.I. AreasNew Areas. State legislation authorizing the establishment of special-purpose districts was more extensive in 1947 than for several years past. Problems of water supply, sewerage, and refuse disposal frequently overlap political boundaries and sometimes involve suburban and rural areas as well as incorporated communities. Several states authorized the creation of special districts to deal with these and related problems. In some instances the districts are permitted to include only unincorporated territory, while in others they may embrace two or more municipalities or both incorporated and unincorporated areas. Nebraska and South Dakota authorized the organization of sanitary districts to provide sewage-disposal facilities in areas outside municipalities. Boards of county commissioners in Utah were empowered to establish improvement districts to provide water supply and sewerage for unincorporated areas. Special districts for supplying water, sewerage, or both, were authorized in Idaho. A Nevada law permits the establishment of districts for supplying water, sewerage, and garbage disposal, singly or in any combination.

The Universal Discount as a Means of Economic Stabilization

THE TERM universal discount, abbreviated u.d., is used to indicate that a percentage discount (or a percentage bounty if the discount is negative) applies to all payments. Thus, payments for wholesale, retail, and producer goods, payments for capital stock, bonids, debts, dividends, interest, rent, and taxes, payments for wages, salaries, and fees; in short, all transfers of funds where the control of the funds is also transferred are included. Transfers of funds where storage is intended and the control of the funds is not altered, as in the case of bank demand deposits for example, would not be considered payments and would not carry the u.d. It is shown that in a model economic system roughly representative of a free economy the u.d. adjusted according to a simple formula removes instability. There is reason to believe without reference to this particular model that the same u.d. adjustment would be a powerful stabilizing influence under actual conditions. Fortunately, since the adjustment would raise (lower) prices when they are tending upward (downward) there would apparently be no serious policing problem in the enforcement of the u.d. adjustment. Since the u.d. changes prices, wages, rents, interest, fees, taxes, etc. all by the same ratio, there is no direct effect of the u.d. on real income as measured currently. Stating it differently, those with unchanging monetary reserves are not directly affected by the u.d. Consequently the introduction of the u.d. for stabilization purposes would involve significant loss only to those who persist in contributing to instability. Conversely only those contributing to stability would be rewarded. The latter would aid sections of an economy that are hard pressed by business-cycle changes. For example, during a rising price level the shrinkage of real income of those on a fixed money income would be reduced. With the u.d. method, such devices as ordinary price control, control of investment, tax-rate variation during the phases of the business cycle, active monetary policy, government spending, would be unnec-

Are we spending too much for government? II. State expenditures–has their upward climb been justified?

AbstractThe eterna lstruggle between Mr. Citizen as taxayer and Mr. Citizen as consumer of government service is well illustrated in this article. One–half of hte money increase in the cost of state government from 1915 to 1925 was due to the rising price level. But over 70 per cent of the actual increase must be charged to expansion in public education and highways; that is, to expenditures demanded by the same people who pay the taxes.

The Course of Profits During the War

T HE counterpart of the cost of living indexes used in so many cases during the war to settle conflicts over wages is an index of profits; for the motive behind wage demands was only in part a matter of rising price levels and rising consumer costs; it was equally a belief on the part of the wage earner that the relative share of capital or management in the national product was increasing, that business men and business firms were receiving vast profits from their war production. In this day of appeal to facts the only way of meeting such a belief and satisfying the demand that goes with it lies in the application of scientific methods to the measurement of the phenomenon in question. When it comes, however, to the matter of constructing an index of profits the task is far from simple; it is by no means as satisfactory as the determination of an index number of prices, for it involves an immediate appeal to industrial accounting systems and the prerequisite to thoroughly satisfactory results is uniform accounting methods. The uniformity of our railroad accounting systems, established after a generation of legislative and administrative struggle, offers a marked contrast to accounting in other fields of privately owned and operated industry. It is possibly a safe forecast of the near future to assume that the interest of the public in profits will increase rather than decrease. The deep interest which the public has shown and is showing in such fundamental industries as coal production may well lead to a greater measure of public control and to a demand for more uniform methods of accounting. The changes in accounting methods by industrial concerns since the passage of the income tax law has been little short of

The American Security Market During the War

Business in the United States is admittedly on a war basis today, and the security market is simply reflecting that abnormal condition. Preceding historic booms in the stock market have usually had as their principal cause some one central idea. An overworked public imagination, obsessed with some widely advertised idea, has usually been responsible for a rise in price levels far beyond the limits of reason. In 1899 the public mind was inflamed by the prospect of large gains from industrial combinations at greatly inflated prices for the constituent companies. In 1901 the possibilities of railway mergers proved to be the moving spirit. In 1906 it was the prospect of greatly increased dividends. In 1909 the alluring bait was melon cutting and the distribution of accumulated assets. At present it seems to be belief in the prosecution of the world's greatest war for some time to come, with the prospect of continued fabulous war profits.