Difinitions Economic Policy

ECONOMIC POLICY (definitions):

Price Stability:

Price stability is the inter-annual increase of the Harmonized Index of Consumer Prices (HICP) for the euro area below 2%.

An economystability medium term price situation is produced when prices don’t change much over time. It is not common for an economy to have price stability. Today central banks mandate to achieve price stability is toreach low and stable inflation.

To see price’s evolution and if their change (inflation) is stable or not, we use indexes that are producedby countries’ statistical services. In Spain we normallyuse the Consumer Price Index (CPI). So, depending on the inter-annual price variation, stability is or it is not achieved over a period of time.

General Level of Prices:
Is an index that tracesthe relative changes in the price of an individual good (or a market basket of goods) over time
In a theoretical sense, the price level is the price of aggregate production. In a practical sense, theprice level is measured by either of two price indexes, the Consumer Price Index (CPI) or the GDP price deflator. The GDP price deflator, is less well-known than the Consumer Price Index, but isusually the price index of choice of the economists.

GDP Deflator:
The GDP deflator is as a measure of changes in the prices of goods and services that are produced in an economy. GDP represent thegross domestic product, the total value of all final goods and services produced within that economy during a specified period..
The GDP deflator is understood to be an example of an implicit pricedeflator for GDP, and as i said before, for the economists is an essential component for determinate the current strength or weakness of the country’s economy.

The formula for calculating the GDPdeflator is very simple. It requires current information of the real GDP and the nominal GDP. Is calculated by taking the nominal GDP, dividing it by a known deflator, and multiplying the result by one...