Background
The Marshall–Edgeworth Price Index is an economic tool used to measure and compare price changes over time for a composite basket of goods and services. It extends the concept of traditional price indices by averaging both the current and base period quantities, aiming to increase accuracy and reduce bias.
Historical Context
The index is named after two influential economists: Alfred Marshall and Francis Ysidro Edgeworth. Despite its importance, the Marshall–Edgeworth Price Index is not as commonly used as other indices like the Laspeyres and Paasche indices but is still valuable for specific applications in economic analysis.
Definitions and Concepts
- Base Period Quantities: Quantities of goods and services consumed during the base (or initial) period.
- Current Period Quantities: Quantities of goods and services consumed during the current period of analysis.
- Arithmetic Mean: The average of the base and current period quantities.
- Base-weighted Index: An index where quantities from the base period are used as weights.
- Current-weighted Index: An index where quantities from the current period are used as weights.
Major Analytical Frameworks
Classical Economics
Classical economists focus on long-term economic growth and emphasize the effects of price indices like the Marshall–Edgeworth on capital accumulation and resource allocation.
Neoclassical Economics
Neoclassical economists analyze how the Marshall–Edgeworth Index affects market efficiency, prices, and consumer behavior through dynamic supply and demand modeling.
Keynesian Economics
Keynesian economists may use the Marshall–Edgeworth Index to analyze short-term price level changes and their impact on aggregate demand and inflationary pressures.
Marxian Economics
Marxian economists might study the Marshall–Edgeworth Index to understand class-based economic dynamics and the distribution of wealth consequent to changing price levels.
Institutional Economics
Institutional economists would consider the influence of institutional settings on the measurement accuracy and applicability of the Marshall–Edgeworth Price Index.
Behavioral Economics
Behavioral economists explore how the perception and interpretation of price changes, as measured by indices like Marshall–Edgeworth, affect consumer behavior and economic decisions.
Post-Keynesian Economics
Post-Keynesian economists assess the relevance of the Marshall–Edgeworth Index in portraying economic irregularities and structural elements affecting price stability.
Austrian Economics
Austrian economists may critically evaluate the utility of the Marshall–Edgeworth Index within the context of market de-centralization and individual price discovery mechanisms.
Development Economics
Development economists use indices like Marshall–Edgeworth to measure inflation and price changes in developing economies, focusing on their impact on poverty and living standards.
Monetarism
Monetarists would consider the Marshall–Edgeworth Price Index when modelling the relationship between monetary supply changes and price levels over fixed periods.
Comparative Analysis
When compared to traditional indices, the Marshall–Edgeworth Index offers a compromise by considering both base and current period quantities, potentially reducing the biases observed in single-weighted indices such as Laspeyres and Paasche.
Case Studies
Several case studies demonstrate the application of the Marshall–Edgeworth Index in national statistics departments worldwide, particularly in inflation measurement and policy analysis.
Suggested Books for Further Studies
- “Economic Index Numbers: Booms, Inflation, and Growth” by R. G. Dyson
- “Applied Economics: Thinking Beyond Stage One” by Thomas Sowell
- “Index number theory and inflation measurement” by Wolfgang Eichhorn
Related Terms with Definitions
- Laspeyres Index: A price index that uses base-period quantities to weight current prices.
- Paasche Index: A price index that uses current-period quantities to weight current prices.
- Consumer Price Index (CPI): An index measuring the average change over time in the prices of a fixed basket of consumer goods and services.
- Inflation: The rate at which the general level of prices for goods and services is rising, decreasing the purchasing power of money.
- Price Stability: The economic aim of minimizing inflation and deflation to ensure sustainable economic growth.
