The general price level is a hypothetical measure of overall
price
A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...
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. The specific meaning and etymology of the term and its ...
s and
services (the
consumer basket), in an economy or
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. 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 versus nominal value (economics), real value of the local currency, as the prices of all goods increase. This causes people to minimiz ...
.
Theoretical foundation
The
classical dichotomy 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 average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
rate could be measured as
:
and “real”
economic growth
In economics, economic growth is an increase in the quantity and quality of the economic goods and Service (economics), services that a society Production (economics), produces. It can be measured as the increase in the inflation-adjusted Outp ...
or contraction could be distinguished from mere price changes by
deflating GDP or some other measure.
:
Measuring price level
Applicable indices are the
consumer price index
A consumer price index (CPI) is a statistical estimate of the level of prices of goods and services bought for consumption purposes by households. It is calculated as the weighted average price of a market basket of Goods, consumer goods and ...
(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
A price index (''plural'': "price indices" or "price indexes") is a normalized average (typically a weighted average) of price relatives for a given class of goods or services in a specific region over a defined time period. It is a statistic ...
*
Equation of exchange
*
Quantity theory of money
The quantity theory of money (often abbreviated QTM) is a hypothesis within monetary economics which states that the general price level of goods and services is directly proportional to the amount of money in circulation (i.e., the money supply) ...
*
Wage level
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