Concept of price index

Value of money

Value of money is the purchasing power of money which is reflected through the amount of goods and services a unit of currency can purchase.

Value of money can increase or decrease. For example, during inflation, value of money decreases and during deflation the value of money increases.

Measuring changes in the value of money

Changes in the value of money are measured through price index. Price index is a figure which measures the relative changes in the price of various commodities from one period to another. That is to say from the base year to the current year.

NOTE: Price index can also be called the cost-of-living index as it gives a picture of changes in the cost of living in a certain area from one period to another. Price indices can be producer's price index, wholesale price index, retailer's price index, etc.