The general price level is a hypothetical measure of overall

price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...

s for some set of

good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...

s and services (the

consumer basket A market basket or commodity bundle is a fixed list of items, in given proportions. Its most common use is to track the progress of inflation in an economics, economy or specific market. That is, to measure the changes in the value of money ov ...

), in an economy or

monetary union A currency union (also known as monetary union) is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration (such as an economic and monetary union, ...

during a given interval (generally one day), normalized relative to some base set. Typically, the general price level is approximated with a daily price ''index'', normally the Daily

CPI A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statistic ...

. The general price level can change more than once per day during

hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...

Theoretical foundation

The

classical dichotomy In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables su ...

is the assumption that there is a relatively clean distinction between overall increases or decreases in prices and underlying, “nominal” economic variables. Thus, if prices ''overall'' increase or decrease, it is assumed that this change can be decomposed as follows: Given a set

C

of goods and services, the total value of transactions in

C

at time

t

is :

P_t\cdot \sum_ (p'_\cdot q_)

where :

q_\,

represents the quantity of

c

at time

t

p_\,

represents the prevailing price of

c

at time

t

p'_

represents the “real” price of

c

at time

t

P_t

is the price level at time

t

The general price ''level'' is distinguished from a price ''index'' in that the existence of the former depends upon the classical dichotomy, while the latter is simply a computation, and many such will be possible regardless of whether they are meaningful.

Significance

If, indeed, a general price level component could be distinguished, then it would be possible to ''measure'' the difference in overall prices between two regions or intervals. For example, the

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

rate could be measured as :

\frac

and “real”

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...

or contraction could be distinguished from mere price changes by deflating

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

or some other measure. :

\frac-\frac

Measuring price level

Applicable indices are the

consumer price index A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statistica ...

(CPI), Default Price Deflator, and the Producer Price Index. Price indices not only affect the rate of inflation, but are also part of real output and productivity.SAMUELSON, P. A., NORDHAUS, W. D. ''Ekonomie.'' 19. vydání. Praha: NS Svoboda, 2013. 715 s. .

References

Sources

* * Mises, Ludwig Heinrich Edler von; ''Human Action: A Treatise on Economics'' (1949), Ch. XVII “Indirect Exchange”, §4. “The Determination of the Purchasing Power of Money”. {{Authority control Pricing Monetary economics

Theoretical foundation

Significance

Measuring price level

See also

References

Sources