## Frequent Links

# Price level

The **general price level** is a hypothetical daily measure of overall prices for some set of goods 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.

## 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}}{t_1 -t_0}</math>

and “real” economic growth or contraction could be distinguished from mere price changes by deflating GDP or some other measure.

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

## See also

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## References

- McCulloch, James Huston;
*Money and Inflation: A Monetarist Approach*2e, Harcourt Brace Jovanovich / Academic Press, 1982. - 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”.