Understanding Economic Equilibrium

CHAPTER 26

Measuring Prices: How Much Is a Dollar?

Measuring the labor market is tricky, but figuring out prices is downright befuddling. Of course, inflation is a core economic focus, but distinguishing between real and nominal movements in price makes calculating inflation something less than an exact science.

Even if inflation were at zero, prices would move relative to one another, that is, make real movements, like the price of peanut butter going up faster than bubble gum. Inflation is often thought of as a change in the value of money: the dollar is worth less today than it was last year or in 2010 or 1970, so both peanut butter and bubble gum would rise in price, regardless of their relative price movements. But prices change because ...