A domestic price level represents the current price for a specific good or service in an economy. Government agencies or national economists tend to look at various price levels in order to assess rising or falling prices, called inflation and deflation in economic terms, respectively. The most common domestic price level is the consumer price index. This index is common in a host of countries; it measures the prices for a basket of goods that most economists deem necessary to individuals in the economy. Price levels can also represent a snapshot in time of prices, allowing for benchmarks among various periods.
Free market economies use price as the determining factor between supply and demand. In this theory, the domestic price levels for goods and services all hinge upon these two basic factors. The problem in most free market economies, however, is that some level of government interaction exists that makes the market less free. Therefore, price levels change due to unnatural causes or factors. Economists look to determine which of these extemporaneous factors are causing the most change in terms of inflation or deflation.
Price levels in a single nation’s economy are often the most important elements of a market. Hybrid economies — those that contain some elements of a free market and government intervention — use the money supply to control inflation. The domestic price level as computed using a consumer price index could signal the amount of inflation. When inflation increases consistently over time, the nation’s government may decide to decrease the money supply. In theory, this should help control inflation and reduce its effect on the economy.
Another use of the domestic price level is the calculation of a country’s gross domestic product (GDP). In the classical sense, GDP represents the market value for all goods produced by a nation. GDP tends to limit the computation of this figure to all goods produced within the natural, domestic borders of the country. A country can experience GDP growth when the dollar value of these goods increases through real production output increases. Inflationary increases in this figure are not representative of true growth.
It is often difficult for an individual to compute a domestic price level. Government agencies, therefore, provide this information on a monthly, quarterly, or annual basis. Economists and other organizations can help track these figures and interpret the data. Central banks or other agencies may provide insight into the figures. This can result in a discussion on the topic or interpretation of the data as computed.