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 ...
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), 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
of goods and services, the total value of transactions in
at time
is
:
where
:
represents the quantity of
at time
:
represents the prevailing price of
at time
:
represents the “real” price of
at time
:
is the price level at time
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 reduct ...
rate could be measured as
:
and “real”
economic growth 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.
:
Measuring price level
Applicable indices are the
consumer price index (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. .]
See also
*
Price index
*
Equation of exchange
*
Quantity theory of money
In monetary economics, the quantity theory of money (often abbreviated QTM) is one of the directions of Western economic thought that emerged in the 16th-17th centuries. The QTM states that the general price level of goods and services is directly ...
*
Wage level
A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remunera ...
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