Price Level

Published Jan 19, 2023

Definition of Price Level

The price level is a measure of the average prices of goods and services in an economy. That means it is a measure of the overall cost of living in a country. It is usually measured by calculating the average price of a basket of goods and services that are representative of the economy.

Example

To illustrate this, let’s look at the price level in the United States. The Bureau of Labor Statistics (BLS) calculates the Consumer Price Index (CPI) to measure the price level in the US (see also How to calculate Consumer Price Index CPI). The CPI is based on a basket of goods and services that are representative of the US economy. This basket includes items like food, housing, transportation, medical care, and other goods and services. The BLS then calculates the average price of this basket and uses it to measure the overall cost of living in the US as well as the changes in the overall price level within the economy.

Why Price Level Matters

The price level is an important indicator of the overall health of an economy. It is closely related to inflation, which is the sustained increase in the price level over time. Inflation can have a significant impact on the economy, as it affects the purchasing power of consumers and businesses. That means it can have a major impact on economic growth and the overall welfare of society. Therefore, it is important for policymakers to keep an eye on the price level and take appropriate measures to keep inflation in check.