Page 32 - The Importance of Common Metrics for Advacing Social Science Theory and Research

The Importance of Common Metrics for Advancing Social Science Theory and Research: A Workshop Summary
http://www.nap.edu/catalog/13034.html

20 THE IMPORTANCE OF COMMON METRICS

reported by BEA in the United States and similar agencies throughout the
world. The basis for these aggregate measures lies in micro-level surveys
of households, firms, and units of government, as well as administrative
records. The measure is intended to allow comparisons of real income
levels in a given country across time and across countries at a given time.
To make the comparisons, adjustments must be made for differences in the
7
purchasing power of a monetary unit using price indices.
Another of the NBER’s projects concerns business cycles, work that is
empirical and atheoretical, motivated by the idea that one needs to gather
an abundance of facts to understand business cycles. In 1947, Tjalling
Koopman made a very strong argument that measurement should be guided
by theory, and economists by and large have abided by this ever since, with
a standard set of beliefs in common practice.
Willis outlined a number of assumptions that have been very important
in the history of economic thought, all of which are quite innocuous on
their own. These assumptions include utility-maximizing consumers and
profit-maximizing firms in a perfectly competitive market economy, with all
quantities and prices being observable. He noted the scientific contribution
of measures of price, quantity, and income as follows:

• Income and related variables are cardinal measures that can be
added, subtracted, multiplied, divided, logged, and exponentiated.
• At the micro level, these variables are the outcomes and determi-
nants of the behavior of individuals and firms that economic sci-
ence seeks to explain.
• At the macro level, short-run macroeconomics and long-run studies
of economic growth depend on consistent measurement of aggre-
gate quantities over time.
• Real income and related measures provide meaningful, interperson-
ally and intertemporally comparable measures of welfare that can
be compared across subgroups.

Willis elaborated on the idea that real income, which is income adjusted
for inflation, can be used for economic welfare analyses that are relevant to
policy often without knowing very much about individual characteristics
or preferences. In discussing data demands for welfare analyses, Willis ex-
plained that the method of revealed preferences requires knowledge of the
full choice set. An individual’s choice set is determined by his or her income
derived from the ownership of resources and the market price of the goods
and services available. He noted that data on goods and services consumed

7 Purchasing power parity indices are embodied in the Penn World Tables, a major effort
that allows conversion of incomes in different countries to comparable measures (Deaton and
Heston, 2010).

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