1a Explain the difference between price and the price level

1.a) Explain the difference between price and the price level. How is the price level measured?

b) What do economists mean by the terms nominal and real? Are nominal statistics or real statistics more useful? Provide a real-world example of a nominal statistic. Provide a real-world example of a real statistic.

Solution

1.
A.
Price is based on one particular product, but price level is based upon the market basket of different type of products and services. Price of the products can increase or decrease with product to product, but price level shows the overall inflationary condition in the economy. Besides, price level is macroeconomic indicator.
Price level is measured using the consumer price index (CPI) or GDP deflator in the economy. It uses current prices as well as base year prices as well.
CPI = (value of basket at current prices/value of basket at base year price)*100
GDP deflator = (Nominal GDP / Real GDP)*100

Comparing two years of CPI, or GDP deflator, will give inflation or rise in price level.

B.
Nominal means the value that already included inflationary impacts, whereas real means, value that is adjusted for the inflation. Nominal is calculated on current price, and real is calculated on base year price. Both are useful. Nominal statistics show the changes due to the price that is not so desirable, but real statistics show the change in output level that is desirable. Both of these statistics are useful, because it helps the government to frame policies and bring price stability as well as economic growth.
Example of nominal statistics is price level and example of real statistics is real GDP or real output.