The P/V Line: An Application of the Theory of Value to Business Forecasting
Prices are determined by three factors: (1) demand intensity (Di), (2) supply pressure, or supply resistance (Sr), and (3) physical volume of supply (V). Price (P) depends upon the relative force or strength of these three. As V varies, it registers a varying P, dependent on the intensity of demand and the resistance of sellers to price declines.
Therefore if we eliminate the effect of the volume factor (V) from prices (P), we have left the relation between Di and Sr. This elimination we can effect, just as we eliminate the seasonal factor from a time series of index numbers. In other words, by adjusting a price series for variation in physical volume we arrive at a series which is neither price nor volume, a series which shows the varying relations between the price- determining forces of demand and supply.
This series is the basis of the "P/V line." The P/V line is a commodity price curve adjusted for variations in physical volume, or a series of ratios between price and volume.
This reasoning is valid for a single commodity; and since indexes of prices and volumes are averages of individual commodities, it can also be applied to the general situation as reflected in such indexes.
The P/V line, by showing the changing trend in the relation between demand and supply, enables us to anticipate the trend of the general price level as measured by price indexes and to know more certainly in what phase of the business cycle we lie at any given time.