Real prices and ideal prices

Real prices and ideal prices refers to a distinction between "actual prices paid" for products, services, assets and labour, and "computed" prices which are "not" actually charged or paid in market trade.Ideal prices, expressed in money-units, can be estimated, theorized or imputed for accounting or calculation purposes, and, even although they may not apply to any actually traded product, asset or service directly, they can nevertheless influence economic behaviour. They are typically prices that would apply in trade, "if" certain assumed conditions apply (and they may not).

Examples of ideal prices

An example of an ideal price would be the value of annual Gross Domestic Product. This aggregate price is an ideal price, "derived" through an accounting procedure from statistical observations of actual prices charged and paid, using principles of value equivalence, conserved/transferred value and newly created value. Included in this ideal aggregate price are many estimated and imputed prices reflecting the assumed monetary value of products and services. But there exist no "real" traded goods or services, or group of traded goods and services, to which that aggregate price exactly corresponds. At best one could say, that this aggregate price reflects a sum of money that "would buy" a certain group of products, assets and services, under specific assumed conditions. In other words, such a price does not correspond directly to real financial flows, but instead analytically groups components of those flows in order to make a valuation which corresponds to an economic concept, in this case value added.

Another example would be an "equilibrium price" calculated by an economist. This is a price which a type of product or asset would have, if supply and demand were balanced. This price does not exist in actual trading processes, it is only an ideal or theoretical price level, which at best is only "approximated" in the real world.

In accounting practice, ideal prices are used all the time. For example, when accountants have to value a stock of assets for tax or audit purposes, they apply rules and criteria to arrive at a price reflecting the cost or market-value of the stock. But this valuation is in truth only hypothetical, because it represents a price which the assets would have "if" they were traded or exchanged under assumed conditions, or if they were replaced. Yet, this ideal price may nevertheless influence a whole lot of transactions based on it.

Actual and potential prices

When goods are produced for sale, they may be priced, but those prices are initially only "potential" prices. There may not be any certainty about whether they will all fetch exactly those prices when they are actually sold, or whether they will be sold at all. In retrospect, the final value of an output may turn out to have been higher or lower than previously anticipated, because for various reasons prices and demand changed in the meantime. Thus, price negotiations and the time factor may change actual prices realised from the prices originally set, and if price inflation occurs there is in addition a difference between the nominal prices and the inflation-adjusted price.

The sale price may be modified also by the difference in time between "purchase" and "payment" - for example, someone may buy a product on credit, and pay interest in addition to the asking price for the product. Consequently, what the "real" price of a thing is, might be a topic of dispute, because it may involve "valuation criteria" which some would not accept, because they apply different valuation criteria.

The number of ideal prices used for calculations in the world vastly exceeds the number of real prices. At any time, most economic goods and services in society are being owned or used, but not traded; nevertheless people are constantly extrapolating prices which would apply "if" they were traded in markets or "if" they had to be replaced.

The use of ideal prices for the purpose of accounting, estimation and theorising has become so habitual and ingrained in modern society, that they are frequently confused with the real prices actually realised in trade. Thus, prices may be viewed only as a kind of data, information, or a type of knowledge.

Money-prices are numbers, and numbers can be computed with exactitude. This seems to make accounting and economics exact sciences. But in the real world, prices can change quickly, due to innumerable conditions. Consequently, in calculating price quantities, a value theory of some sort is usually applied, regardless of whether this is made explicit or not. And, typically, this value theory refers to prices which would apply under certain assumed conditions, moving between real prices and ideal prices.

ee also

*Price
*Exchange value
*Comparative statics
*Reproduction (economics)
*Heterodox economics

References

Oskar Morgenstern, "On the Accuracy of Economic Observations", 2nd edition, Princeton University Press, 1965.