What is the price level?

The concept of the price level of a country refers to the weighted average of the prices of the main goods and services. Weighted goods and services are normally related to the importance given to them in the country, depending on the best before date attributed to them by the people or the national production they have.

In other words, the price level refers to the average value of goods and services in a country at a given moment of time.

In order to calculate the price level we must take into account the value of all goods and services that are of relevant importance to the country's economy in a given period:

(P1+P2+P3+...+Pn) / N

Where P1, P2, P3, Pn = Value of the good or service 1, 2, 3, ... n

N = Total number of goods or services that are taken into account

It is important to mention that, when there is a variation in price levels, it is said that we are facing a change in the cost of living of the citizens of a certain country. When this value increases above normal we are faced with a inflation, while if it falls below it is deflation.

On the other hand, it is important to differentiate between the price level and the price index. We have already seen the first concept, and the second refers to the movement of the general price level that occurs between two periods. This index is calculated at two price levels in percentage levels. The main price indices are the IPC and GDP deflator.

Finally, we should mention that the value attributed to certain goods and services depends and varies according to the country in which we are located. Developing countries will value some goods more than others.

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