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 process of analysis helps to form an idea of the change in the state of the economy over time, and also to get a clear idea of inflation, living standards of the population, the state of individual sectors of the economy. The methods of its calculation and the principles of analysis, as well as factors of influence and some features are discussed below.
Definition of concepts and calculation methods
Price is the number of monetary units for which the seller is ready to give one unit of his product. The weighted average value is quite easy to obtain for any quantity 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 number of various goods and services, the cost of which must be taken into account. In this case, a special indicator is applied for the combination. 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 in line with one another, in other words to level out heterogeneity, they are usually balanced. This is done either by a quantitative indicator or by value, using calculation methods called the Paasche or Laispeyres price index. The first shows the level of cheaper or more expensive 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 individually for its industries. For example, for industry, agriculture, transport, housing and communal services, etc. For the analysis of 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 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, not the numerical values, but the tendency of their changes are more significant.
GDP deflator
The most common indicator that 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 price level. Inflation in this case will inevitably occur, 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 analysis, it is necessary to compare the indicators of several previous periods and make adjustments to the normal level of appreciation. Calculations are usually made by government statistics agencies. The values are expressed for convenience of perception and analysis not in monetary units, but in percent.
Private consumption deflator
Also, often the general price level is considered using an indicator, which is calculated as the ratio of the nominal value of household spending on final consumption to their real size. This is called a personal consumption spending 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 the preferences of the final consumer, based on the transition from more expensive products to cheaper counterparts.
Consumer price index
The most understandable for the masses is the third indicator. It is called the consumer price index. In this case, an 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 have a healthy life, essentials and personal hygiene items, clothes and shoes. All other components vary depending on the standard of living. In some countries, only the essentials are taken into account, while in others, leisure and entertainment are among other things. This indicator, taken together with the income level of an average family, provides a clear idea of the standard of living, price changes and its impact on the life of the state’s population. It is also calculated by a simple ratio of the values of the base and reporting periods.
Influence factors
There are many constant and variable circumstances and phenomena that affect price levels. Goods and services in the domestic market of a country change their value, reacting very sharply to:
- World price fluctuations not related to the internal activities of the state. As much as possible, this reflects on the cost of energy carriers (oil, gas), as well as essential goods (sugar, grains, fats), and on goods whose production is associated with them.
- An unstable political situation inside the country (revolutions, popular unrest, constant change of power, etc.).
- Unpredictable natural disasters that entail loss of crops, destruction and other negative consequences.
- Depending on the export or import dependence of the state, the above factors in those countries with which the closest foreign economic relations are established may also affect the general price level within the country.
- The presence and effectiveness of antitrust laws, government regulation of consumer basket pricing, or the complete absence of such an intervention.
In addition, the analysis should take into account that the higher the indicator of the general price level, the greater the amount of money required by the end user. Based on this, the nominal demand for money will always change in proportion to the general price level.