Constant prices

economic-dictionary

We speak of constant prices when we refer to those that serve as a reference at a certain time to establish a comparison with subsequent prices. It is a concept very frequently used in the field of economics and, more specifically, in finance. They are also known as base year prices.

Through constant prices, it is possible in the economic spectrum to make comparisons or analysis of variations of different measurements such as GDP or CPI between different periods of time. With these prices of various goods or services, the base or reference year from which the study is carried out is determined.

The main reason for economic and financial analysts to use this indicator is to avoid the influence of price fluctuations over time or inflation on these measurements. This, in order to be able to draw better conclusions taking the aforementioned base year as a reference or origin. In this way, it is possible to carry out estimates on multiple variables of the economy taking into account the real variation of production.

This aspect is what differentiates constant prices from current prices, which do take into account the role and influence of inflation in their measurements, since they establish the evolution of prices for each period of time.

Constant prices example

We speak of constant prices if we imagine that the price of a particular bicycle in 2012 is 200 euros, while in current prices of 2016 we would see that the same bicycle in 2016 costs 325 euros.

To analyze and compare their prices, we would take the 2012 price as a reference, in order to draw conclusions about the changes that may have occurred and marginalize the influence of inflation.

Suppose that 1000 bicycles were manufactured in 2012 and 1000 units were also manufactured in 2016. If we look at the total prices in current prices for each year, we would observe a nominal increase of 62% between 2016 and 2012, since the production of bicycles in 2016 was 325,000 euros, while in 2012 it was 200,000 euros. However, bicycle production did not increase. Therefore, to avoid the influence of prices, when calculating many economic data the prices of a previous year are used, that is, constant prices.

Measuring at constant prices, we observe what a good would cost today using prices from the reference year and leaving aside the variation that prices have experienced between both periods. In the previous case, the real variation would be 0%, since using the prices of 2012 (200 euros each bicycle) in 2016, 200,000 euros of bicycles were manufactured, exactly the same as in 2012, because production did not increase. .

In this case it is very easy to see it, but when measuring the manufacture of millions of products in an economy, the calculation becomes complicated and therefore it is very important to distinguish between constant and current prices, that is, between real and nominal measurements.

Tags:  passes present markets 

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