Thursday, 14 February 2019

Price indices

The House of Lords has a report on the problems with the RPI (Report: Measuring Inflation (PDF).  They have a neat box explaining some of the formulae effects, Box 4.

The data are below.  The purpose of a price index is to find out if prices have risen or fallen over a period.  (Digression: note 9 explains this wonderfully: 

The Bishop had been tasked with determining whether a 15th century stipulation by an Oxford college—that a fellow of the college must vacate his fellowship if his annual income exceeded five pounds—should still be adhered to. He investigated the change in the value of money over the period by assessing changing price levels and found that five pounds in the mid-15th century was worth 25 to 30 pounds in the late 17th century/early 18th century. He concluded that the intention behind the 15th-century stipulation was to allow for the changing value of money. Robert O’Neill et al (2017), Inflation: History and Measurement, Palgrave Macmillan.)

 Returning to the Box, as can be seen the price ratios are a mix of rises and falls.

Box 4.
For the purposes of illustration, it is assumed that there are four varieties of potato available in shops: Charlotte, King Edward, Maris Piper and Vivaldi. The table below shows the price of each variety in October 2017 and October 2018, and the percentage increase/decrease in price, expressed as a ratio, between the two periods.


Price in Oct 2017 (£)

Price in Oct 2018 (£)

Price ratio



King Edward


Maris Piper





And when you use different indices, you get different results

  • Carli: the price ratios are added together and divided by the number of products: (0.95 + 0.80 + 1.05 + 1.25) ÷ 4 = 1.0125
  • Dutot: the ratio of price averages in October 2017 and October 2018 is calculated:
    Average price in Oct 2018: ((1.90 + 1.60 + 1.89 + 2.50) ÷ 4) = 1.9725
    Average price in Oct 2017: ((2.00 + 2.00 + 1.80 + 2.00) ÷ 4) = 1.95
    Ratio of average prices: 1.9725 ÷ 1.95 = 1.0115
  • Jevons: the price ratios are multiplied together and the 4th root is taken: (0.95 × 0.80 × 1.05 × 1.25)1/4 = 0.9900
In this example, the Carli and Dutot formulas produce a 1 per cent average price increase in potatoes over the period whereas the Jevons formula produces a 1 per cent decrease.

Wednesday, 13 June 2018

Various teaching links

1. Via Tim Taylor, the philospher Michael Sandel on the limits of markets, series of videos.

2. Via Jonathan Athow, ONS, @jathers two very good links on measuring trade correctly:   and and

Friday, 20 April 2018

Various teaching links

We discussed the role of the state in the last section of class on Wednesday. Here is a typically insightful essay by Tim Taylor on what the state can and cannot do.

Friday, 6 April 2018

Today's productivity release

The ONS productivity release is out.

Performance is still horrible.  Pre recession grwoth in GDP per hour was 2%, now it's been 1% for a decade.  There is a very slight pick up in the quarterly rate, but nothing very strong.

This means we still have a 20% gap with the competition

What is going on? It seems to be a combination of many things.  One very helpful release are the MFP numbers, now quarterly.  So part of the slowdown is capital, but most is TFP.

 One thing that is a big change is the contribution of labour allocation.  In the previous release this was very large, accounting for 60% of the slowdown in output per hour. This release excludes sector L and finds that it now accounts for very little of the slowdown, in that it was negative before the recession and is still negative.

 There is also a large contribution of financial services in London to the slowdown. Perhaps it's a combination of lots of these small things.