General price levels in the economy

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

To determine and digitally express the state of the economy of any state, many different indices are used. These include general price levels. This aggregate indicator in the analysis process helps to form an idea of the change in the state of the economy over time, as well as to get a clear idea of inflation, living standards of the population, the state of individual sectors of the economy. Below are the methods of its calculation and the principles of analysis, as well as the factors of influence and some features.

Definition of concepts and calculation methods

Price is the number of monetary units for which the seller is willing to give one unit of his product. The weighted average value is quite easy to obtain for any amount of a homogeneous product. When it comes to planning and analyzing the economy of an entire country, there is a need to consider a huge variety of goods and services, the cost of which must be taken into account. In this case, a special indicator is used for aggregation. Gener althe price level determines the average value of the cost of goods and services in the economy for a variety of goods. To bring values in line with one another, in other words, to level out heterogeneity, they are usually balanced. This is done either by quantity or by value, using methods of calculation called the Paasche or Laispeires price index. The first shows the level of price reduction or appreciation of goods in the base period. The second reflects the degree of change in the price of the base period due to increases or decreases in the reporting period.

Scope and subtleties of analysis

Price levels are calculated both for the entire economy as a whole and separately for its sectors. For example, for industry, agriculture, transport, housing and communal services, etc. To analyze foreign economic activity, price levels for exported and imported goods are calculated. In this case, do not take into account the prices of the domestic market, i.e. those that are established in the domestic market of the state. The most important principle of analysis is to consider the values of indicators over time. In other words, it is not the numerical values that are more significant, but the trend of their changes.

GDP deflator

The most common measure used to analyze price levels is calculated by simply dividing nominal GDP by real GDP. Based on the components of the formula, it is called the GDP deflator. The calculation is made for several periods and reflects the price level. Inflationin this case, it will inevitably take place, due to the constant increase in the cost of goods and services, as well as an increase in the money supply in circulation. For a full-fledged analysis, it is necessary to compare the indicators of several previous periods and make adjustments for the normal level of appreciation. Calculations are usually made by government statistical agencies. Values are expressed for ease of perception and analysis not in monetary units, but in percentages.

Personal consumption expenditure deflator

Also often, the general price level is considered using an indicator that is calculated as the ratio of the nominal value of household expenditures on final consumption to their real size. This is called the personal consumption expenditure deflator. In this case, the nominal value of the cost is taken at current prices, and the real value is taken at constant prices. A distinctive feature of this indicator is that it is not susceptible to changes in end-consumer preferences based on the transition from more expensive products to cheaper analogues.

CPI

The third indicator is the most understandable for the broad masses. It is called the consumer price index. In this case, the increase in the price level is calculated on the basis of changes in the value of the so-called "basket". It includes food products necessary for a person to live a full he althy life, basic necessities and personal hygiene items, clothes and shoes. All other components varydepending on the standard of living. In some countries, only the essentials are taken into account, while in others, recreation and entertainment are among other things. This indicator, combined with the income level of the average family, allows you to get a clear picture of the standard of living, price changes and its impact on the life of the population of the state. It is also calculated by a simple ratio of the values of the base and reporting periods.

Influencing factors

There are many constant and variable circumstances and phenomena that affect price levels. Goods and services in the domestic market of the country change their value, reacting very sharply to:

• World fluctuations in prices not related to the internal activities of the state. This has a maximum impact on the cost of energy resources (oil, gas), as well as essential products (sugar, grains, fats), and on goods whose production is associated with them.
• Unstable political situation inside the country (revolutions, popular unrest, constant change of power, etc.).
• Unpredictable natural disasters that cause crop losses, destruction and other negative consequences.
• Depending on the export or import dependence of the state, the overall price level within the country may also be affected by the above factors in those states with which the closest foreign economic relations are established.
• Presence and effectiveness of antimonopoly legislation, state regulationpricing for the consumer basket or the complete absence of such intervention.

In addition, the analysis should take into account that the higher the general price level, the more money the end consumer needs. Based on this, the nominal demand for money will always change in proportion to the general price level.