price index theory

Price index theory involves measuring how the prices of a basket of goods and services change over time. It helps us understand inflation or deflation by comparing current prices to a base period. The index is calculated using average prices, allowing for consistent tracking of price changes across time or regions. Think of it as a way to see if the cost of living is going up or down, without focusing on individual prices. This straightforward measure supports economic analysis, policy decisions, and adjusting wages or pensions to maintain purchasing power.