What is the overall price level

The term price level has two meanings in the business world. One meaning relates to the price of assets traded in the market. The other meaning relates to the price of goods and services and is used in relation to inflation. In a more general sense, price level refers to a static picture of the price of a given good, service, or tradable collateral. Price levels are presented as a discrete value.

What is the significance of the price level in the national economy?

When economists refer to the price level, they are referring to the purchasing power of money or to inflation / deflation. In other words, economists describe the state of the economy by looking at how much people can buy a currency with the same amount of money. The most common price index is the consumer price index.

The price level is determined on the basis of a “shopping basket”, in which a collection of consumer goods and services is determined as a whole. Changes in the total price over time change the index up or down. Weighted averages are typically used in place of geometric averages. The price level always provides a snapshot of the prices at a particular point in time so that changes in the general price level can be checked over time. When prices rise (inflation) or fall (deflation), consumer demand for goods is also influenced, which in this context means that gross domestic product (GDP) also rises or falls.

Differentiated consideration of different price levels

The price level is a certain average of the prices of a roughly defined product group.
The levels of the
  • Consumer prices
  • Wholesale prices
  • Producer prices

determined. No index includes wages, salaries and other sources of income in the shopping cart. Likewise, assets such as stocks and real estate are not included in the common shopping carts. Thus, a rise in the stock market index or in labor income, for example, is usually not defined as inflation. Another technique for obtaining price indicators are what are known as deflators. The GDP deflator, for example, shows the ratio of nominal to real gross domestic product over the course of a year. Unlike the consumer price index, the basis of the GDP deflator is not a rigid basket of goods Are taken into account.

The price level is one of the most important economic indicators worldwide. It is widely believed that prices should remain relatively stable from year to year in order to avoid excessive inflation with soaring prices. When the price level rises too quickly, central banks or governments look for ways to reduce the supply of money or the aggregate demand for goods and services. Conversely, if the infiltration rate is too low from the central banks' point of view, monetary policy is relaxed and the amount of money in circulation is increased by the central banks. In the EU, the European Central Bank is aiming for an inflation rate of around 2%.