Thegeneral price level is a hypothetical measure of overallprices for some set ofgoods andservices (theconsumer basket), in an economy ormonetary union during a given interval (generally one day),normalized relative to some base set. Typically, the general price level is approximated with a dailypriceindex, normally the DailyCPI. The general price level can change more than once per day duringhyperinflation.

Theclassical dichotomy is the assumption that there is a relatively clean distinction between overall increases or decreases in prices and underlying, “nominal” economic variables. Thus, if pricesoverall increase or decrease, it is assumed that this change can be decomposed as follows:

Given a set${\displaystyle C}$ of goods and services, the total value of transactions in${\displaystyle C}$ at time${\displaystyle t}$ is

${\displaystyle \sum _{c\in C}(p_{c,t}\cdot q_{c,t})=\sum _{c\in C}[(P_t\cdot p_{c,t}^{\prime })\cdot q_{c,t}]=P_t\cdot \sum _{c\in C}(p_{c,t}^{\prime }\cdot q_{c,t})}$

where

${\displaystyle q_{c,t}}$ represents the quantity of${\displaystyle c}$ at time${\displaystyle t}$

${\displaystyle p_{c,t}}$ represents the prevailing price of${\displaystyle c}$ at time${\displaystyle t}$

${\displaystyle p_{c,t}^{\prime }}$ represents the “real” price of${\displaystyle c}$ at time${\displaystyle t}$

${\displaystyle P_t}$ is the price level at time${\displaystyle t}$

The general pricelevel is distinguished from a priceindex in that the existence of the former depends upon the classical dichotomy, while the latter is simply a computation, and many such will be possible regardless of whether they are meaningful.

If, indeed, ageneral price level component could be distinguished, then it would be possible tomeasure the difference in overall prices between two regions or intervals. For example, theinflation rate could be measured as

${\displaystyle \frac{(P_{t_1}-P_{t_0})/P_{t_0}}{t_1-t_0}}$

and “real”economic growth or contraction could be distinguished from mere price changes bydeflatingGDP or some other measure.

${\displaystyle \frac{(GDP{)}_{t_1}}{P_{t_1}}-\frac{(GDP{)}_{t_0}}{P_{t_0}}}$

Applicable indices are theconsumer price index (CPI), Default Price Deflator, and the Producer Price Index.

Price indices not only affect the rate of inflation, but are also part of real output and productivity.^[1]

• Price index
• Equation of exchange
• Quantity theory of money
• Wage level

• McCulloch, James Huston (1 January 1982).Money and Inflation: A Monetarist Approach. Academic Press.ISBN 978-0-12-483051-6.
• Mises, Ludwig Heinrich Edler von;Human Action: A Treatise on Economics (1949), Ch. XVII “Indirect Exchange”, §4. “The Determination of the Purchasing Power of Money”.

• Pricing
• Monetary economics

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