Editing Price level

{{short description|Hypothetical measure of overall prices}}
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The '''general price level''' is a hypothetical measure of overall [[price]]s for some set of [[Good (economics)|good]]s and [[Service (economics)|service]]s (the [[consumer basket]]), in an economy or [[monetary union]] during a given interval (generally one day), [[numéraire|normalized]] relative to some base set.  Typically, the general price level is approximated with a daily [[price index|price ''index'']], normally the Daily [[Consumer price index|CPI]]. The general price level can change more than once per day during [[hyperinflation]].

== 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 <math>C</math> of goods and services, the total value of transactions in <math>C</math> at time <math>t</math> is
:<math>\sum_{c\,\in\, C} (p_{c,t}\cdot q_{c,t})=\sum_{c\,\in\, C} [(P_t\cdot p'_{c,t})\cdot q_{c,t}]=P_t\cdot \sum_{c\,\in\, C} (p'_{c,t}\cdot q_{c,t})</math>
where
:<math>q_{c,t}\, </math> represents the quantity of <math>c</math> at time <math>t</math>
:<math>p_{c,t}\,</math> represents the prevailing price of <math>c</math> at time <math>t</math>
:<math>p'_{c,t}</math> represents the “real” price of <math>c</math> at time <math>t</math>
:<math>P_t</math> is the price level at time <math>t</math>

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]] rate could be measured as

:<math>\frac{(P_{t_1}-P_{t_0})/P_{t_0}}{t_1 -t_0}</math>

and “real” [[economic growth]] or contraction could be distinguished from mere price changes by [[GDP deflator|deflating]] [[GDP]] or some other measure.
:<math>\frac{(GDP)_{t_1}}{P_{t_1}}-\frac{(GDP)_{t_0}}{P_{t_0}}</math>

== 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.<ref>SAMUELSON, P. A., NORDHAUS, W. D. ''Ekonomie.'' 19. vydání. Praha: NS Svoboda, 2013. 715 s. {{ISBN|978-80-205-0629-0}}.</ref>

== See also ==
{{Portal|Economics}}
*[[Price index]]
*[[Equation of exchange]]
*[[Quantity theory of money]]
*[[Wage level]]

== References ==
{{Reflist}}

==Sources==
* {{cite book|first=James Huston|last= McCulloch|title=Money and Inflation: A Monetarist Approach|url=https://books.google.com/books?id=Ju4iAQAAMAAJ|date=1 January 1982|publisher=Academic Press|isbn=978-0-12-483051-6}}
* [[Ludwig von Mises|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”.

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[[Category:Pricing]]
[[Category:Monetary economics]]