Theory Of Money And Prices
The theory of money. we are concerned with the duct urination of the value of money which has an inverse relationship with the general price level. There are .M..two main questions concerning the value of money. how change in the value or money (or prices) arc measured and (b) how the value or illogical. inductance, i.e the factors governing price fluctuations. .We first take up the measurement of the changes in the done by means of index numbers.
Preparation of Index Numbers
The following are the various steps in the construction of such an index numbcr.-e- (il Choice of thc base year, The first step is to choose a year 10 serve as the base year. i.e., the year with reference 10 which the price changes in other years are expressed’ as percentages. Care must be exercised in its selection. It should be an average year, neither a year uf boom nor of depression. Sometimes an average (of prices) of a number of years is taken 10 serve as the base.
(ii) Scheduled of commodities. The second step is to select commodities the prices of which have 10 be taken to represent the general price-level. The Commodities should be really representative and should be sufficiently large in number. The selection of commodities also depends on the object with which the index. is prepared. For in trance, if the object is to study how the cost of living of workinging class has been affected by price changes, we select tho ecommodities which figure in the con gumption of the working class.