What does a price index measure?

What does a price index measure?

• A. Measures the total quantity of goods produced.
• B. Measures the cost of purchasing a given market basket in a given year.
• C. Measures the unemployment rate.
• D. Measures government spending.

Answer: (B)

A price index measures changes in the overall price level over time by tracking how much it costs to buy a fixed basket of goods and services in different years. It compares the cost of that same market basket in a given year to its cost in a base year, typically using a formula like: price index = (cost of basket in year / cost of basket in base year) × 100. For example, if the basket costs 200 in the base year and 210 in the current year, the index is 105, signaling a 5% rise in prices. This approach directly captures how prices move, not how much is produced, how many people are unemployed, or how much the government is spending. The description that measures the cost of purchasing a given market basket in a given year matches what a price index is designed to do, making it the best choice.

A price index measures changes in the overall price level over time by tracking how much it costs to buy a fixed basket of goods and services in different years. It compares the cost of that same market basket in a given year to its cost in a base year, typically using a formula like: price index = (cost of basket in year / cost of basket in base year) × 100. For example, if the basket costs 200 in the base year and 210 in the current year, the index is 105, signaling a 5% rise in prices.

This approach directly captures how prices move, not how much is produced, how many people are unemployed, or how much the government is spending. The description that measures the cost of purchasing a given market basket in a given year matches what a price index is designed to do, making it the best choice.