THE MEANING OF COMPARISONS OF PURCHASING POWER

When the composite commodity representative of expenditure is stable in its constitution for different classes and different situations, and tastes are unchanged, comparisons of purchasing power raise no theoretical difficulty. To prepare a series of index numbers of the price of a specified composite commodity over a series of positions in time or place involves no problem beyond the practical one of obtaining a series of reliable price quotations for individual commodities.

In fact, however, the composite commodities representative of the actual expenditure of money incomes are not stable in their constitution as between different places, times or groups. They are unstable for three reasons—either (i) because the need which the object of expenditure is intended to satisfy, i.e. the purpose of the expenditure, varies, or (2) because the efficiency of the object of expenditure to attain its purpose varies, or (3) because there is a change in what distribution of expenditure between different objects is the most economical means of attaining the purpose. The first of these reasons we may classify as a change in tastes, the second as a change in environment, and the third as a change in relative prices. For these reasons every change in the distribution of real incomes or in habits and education, every change in climate and national customs, and every change in relative prices and in the character and qualities of the goods offering for purchase, will affect in some degree the character of average expenditure.