Price Level in Economics: Definition & Equation

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  • 0:03 Price Level Defined
  • 1:10 Changes to the Price Level
  • 1:30 Measuring Price Level
  • 2:21 Price Level Equation
  • 3:44 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting

Brianna has a masters of education in educational leadership, a DBA business management, and a BS in animal science.

In this lesson, we'll learn about price level in economics. We'll define the term, learn how it changes, determine a popular way to measure it, and then learn how to calculate it.

Price Level Defined

Most of us are familiar with how a camera works. When we want to capture a particular moment so that we don't forget it, we immediately pull out our cell phones or cameras and snap a few shots. We've all done this at one time or another. Perhaps it was when our child reached a milestone, or we were reunited with a loved one we haven't seen in many years, or we were on vacation and saw a historical landmark.

Whatever the occasion, a camera has been the go-to source to preserve memories for years to come. But, what if we needed to visualize how the economy was performing at a particular time? Would a camera be efficient in documenting this kind of information? Probably not, but thankfully, economists have developed what we call a price level, which works in a similar fashion.

A price level is the measurement of current prices of goods and services produced in the economy in a specific region or country at a specific time. In simpler terms, price level can be compared to a picture we take with our cameras, only the picture is 'hypothetical' and is of the price of goods or services in a particular time frame. This picture allows economists to monitor changes to the price level.

Changes to the Price Level

In order to understand how to calculate price level, we need to explain situations that affect it. The first thing you need to know is that the price level can change. These changes are related to inflation and deflation. Inflation refers to an increase in the price level of goods, whereas deflation describes a decrease in the price level of goods.

Measuring Price Level

Perhaps the most popular way to measure price level is utilizing the consumer price index (CPI), which is an estimate of how common goods and services that consumers purchase change in price. You may be asking yourself right now, how are the prices of goods measured? Well, first of all, the government decides what goods and services are frequently purchased by average consumers and compiles a list. Since the list contains things a consumer would purchase, it is given the name consumer price index. Items range anywhere from bananas and crackers to a stove to a TV and even an amusement park ticket. However, the CPI doesn't include investments, like stocks or life insurance. The government then determines the price for every item on the list and calculates what the total cost would be for those items, known as the price level.

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