What is a general price index?
The general price index is an economic measurement that evaluates the change in the prices of goods and services. This index often measures inflation on the market, which artificially increases the prices of goods and services at wholesale and consumer level. Common price indices include the price deflator, the price of consumers and the wholesale price index. Examples of formulas used to calculate the general price index include Laspeyres, Paasche and Fisher Ideal. Each of these methods tells a different story in terms of market changes in terms of one item.
Laspeyres Price Index compares the price of one item currently with the basic period. The question to which it is necessary to answer today is the selling price compared to a product with similar quality in the identified basic year. The basic year is 100 percent, while the current values are above or below. Under the basic year, it indicates a reduction in prices, while values above 100 percent tend to indicate rising prices. This may be eivkey with deflation or inflation; However, it is possibleto overcome the effects of inflation with this general price index.
Measurement of the Paasche Index The General Price compares the current price of the product today with the same product in the basic year. In most cases, the basic year may be the same for this index as the year for the Laspeyres price index. Although this index provides some useful information, it may not be among the most published in the economy. The biggest disadvantage is that consumer preferences have changed over time. Therefore, the comparison of the general price index today with the basic year index disrupts the fact that the same product may not be so valuable in the basic year.
Calculate the Fisher IDEX index is trying to remove any distortion from the previous two formulas. This is compared by a general price index for the product today in Constant Dollars. The formula naturally removes inflation from the equation and therefore eliminates any overestimation of this image. Unfortunately, the Fisher Ideal Index also BRTo individuals in a price measurement in good or service. Another problem in the formula is how difficult it is to remove the effects of the previous two measurements in terms of the general price index.
Economists can use any diversity of general price indices to assess the health of the economy. The purpose is to measure the power of the overall economy and various industries inside. Monthly or quarterly calculations are common, so individuals can determine the trend of rising or falling prices.