General price levels in the economy

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

Definition of concepts and methods of calculation

Price - this is the number of currency units for which the seller is willing to give one unit of its goods. The weighted average value is fairly easy to obtain for any quantity of a homogeneous product. When it comes to planning and analyzing the economy of a whole country, there is a need to consider a huge number of diverse goods and services, the cost of which must be taken into account. In this case, a special indicator is used for the association. The general price level determines the average value of the cost of goods and services in the economy for a variety of goods. To bring the values into alignment with one another, in other words to level out the heterogeneity, they are usually balanced. This is done either by a quantitative measure or by a value, using calculation methods, which are called the price index Paasche or Laispeires. The first shows the level of cheapening or rise in price of goods in the base period. The second reflects the degree of change in the price of the reference period due to increases or decreases in the reporting period.

Scope and subtlety of analysis

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

The GDP deflator

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

Deflator of expenses for personal consumption

Also, the general price level is often considered using the indicator, which is calculated as the ratio of the nominal value of household spending on final consumption to their actual size. This is called the deflator of personal consumption expenditure. At the same time, the nominal value of value is taken in current prices, and the real value in constant prices. A distinctive feature of this indicator is that it is not susceptible to changes in the preferences of the end user, based on the transition from more expensive goods to cheaper counterparts.

Consumer price index

The most understandable for the broad masses is the third indicator. 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 necessary for a person for a full healthy life, basic necessities and personal hygiene, clothing and footwear. All other components vary depending on the standard of living. In some countries, only the essentials are taken into account, while in others, rest and entertainment are among other things. This indicator, in conjunction with the level of income of the average family, gives a clear idea of the standard of living, the change in prices 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 accounting periods.

Factors of influence

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

• World price fluctuations, not related to domestic activities of the state. The maximum is reflected in the cost of energy carriers (oil, gas), as well as basic products (sugar, grains, fats), and for goods whose production is associated with them.
• Unstable political situation inside the country (revolutions, popular unrest, constant change of power, etc.).
• Unpredictable natural cataclysms, which entail loss of crops, destruction and other negative consequences.
• Depending on the export or import dependence of the state, the above factors can also affect the overall price level within the country in those states with which the closest foreign economic ties are established.
• The availability and effectiveness of the work of the antimonopoly legislation, the regulation by the state of the pricing of the consumer basket or the complete absence of such interference.

In addition, the analysis should take into account that the higher the indicator of the general level of prices, the more money is required by the end user. Proceeding from this, the nominal demand for money will always change in proportion to the general price level.