Chapter 13* - Accounting Prices and Inclusive Wealth

Summary

Here we derive equations for optimum allocations of goods and services in the global economic model of Chapter 4*. The equations are dynamic, and represent rules for determining the optimum mix of consumption and investment in capital goods. The criterion for optimality adopted here is the present value of well-being across the generations (Chapter 10). For vividness, we may imagine that the social evaluator, who was introduced in Chapter 10, performs the optimisation exercise and derives the movement of accounting prices of goods and services over time. The procedure is at the heart of a decentralised economy guided by the state on matters where the price system performs badly. We confirm that the dynamical equations that govern the movement of accounting prices are none other than the arbitrage conditions of Chapter 1 (Box 1.3). That is why in Chapter 10 the social evaluator was also referred to as the citizen investor.