To clarify, you’re saying it would be hard to do this in the other direction, not that doing it in the other direction would give the same results?
When we attempt to convert between 1843 GBP and modern USD, the overall process is essentially: convert from 1843 GBP to some quantity of goods and services, then figure out how much that quantity of goods and services would cost in modern USD.
I like how this makes it more concrete what we’re trying to ask. And it kind of suggests we should get the same answer whichever way we do it.
But we haven’t made it explicit what basket of goods and services we’re looking at. I guess that’s implicitly chosen by the inflation index? And those indexes are frequently swapping things in and out, so if we use something like CPI, what we’re actually measuring is: “buy a bundle of goods and services in 1843 for £1. Let’s say it includes candles. At some point we swap out the candles for some number of incandescant lightbulbs, and then we swap out those for LED lightbulbs. Maybe other swaps on the way. Also, probably things just sometimes get straight added to the bundle or removed from it. In 2021 we sell the bundle for USD. How much USD do we get?” And the UK and US indexes will start with different bundles of goods and services, and make different updates on the way. I guess partly based on the whims of economists having to choose between a bunch of reasonable options, and partly based on the UK and US having different situations causing different options to be reasonable?
(Also, even if we specify the goods and services, “what does it cost” doesn’t have a single answer; things will cost different amounts in London versus York, or in New York, New York versus New London, Alabama. When we “buy” the basket we’re taking some weighted average and the same when we “sell” it. But this might be the same no matter which direction we go?)
Hm, so if I’m right about this… if we did have an inflation index for both currencies that used the same bundle of goods and services, we’d be able to calculate PPP in 1843 as “whatever value means we get the same answer both ways”? (But it would be PPP for that specific bundle of goods and services.)
In theory, you should be able to get the same answer both ways, because they represent the same concept. In practice, I agree that you would get different answers because of the kinds of issues you’re bringing up around what you choose to include in the basket and how you adjust for quality/substitution
I forgot about PPP, thanks.
To clarify, you’re saying it would be hard to do this in the other direction, not that doing it in the other direction would give the same results?
I like how this makes it more concrete what we’re trying to ask. And it kind of suggests we should get the same answer whichever way we do it.
But we haven’t made it explicit what basket of goods and services we’re looking at. I guess that’s implicitly chosen by the inflation index? And those indexes are frequently swapping things in and out, so if we use something like CPI, what we’re actually measuring is: “buy a bundle of goods and services in 1843 for £1. Let’s say it includes candles. At some point we swap out the candles for some number of incandescant lightbulbs, and then we swap out those for LED lightbulbs. Maybe other swaps on the way. Also, probably things just sometimes get straight added to the bundle or removed from it. In 2021 we sell the bundle for USD. How much USD do we get?” And the UK and US indexes will start with different bundles of goods and services, and make different updates on the way. I guess partly based on the whims of economists having to choose between a bunch of reasonable options, and partly based on the UK and US having different situations causing different options to be reasonable?
(Also, even if we specify the goods and services, “what does it cost” doesn’t have a single answer; things will cost different amounts in London versus York, or in New York, New York versus New London, Alabama. When we “buy” the basket we’re taking some weighted average and the same when we “sell” it. But this might be the same no matter which direction we go?)
Hm, so if I’m right about this… if we did have an inflation index for both currencies that used the same bundle of goods and services, we’d be able to calculate PPP in 1843 as “whatever value means we get the same answer both ways”? (But it would be PPP for that specific bundle of goods and services.)
In theory, you should be able to get the same answer both ways, because they represent the same concept. In practice, I agree that you would get different answers because of the kinds of issues you’re bringing up around what you choose to include in the basket and how you adjust for quality/substitution