Final answer:
Economists use price indices rather than dollar values to measure price levels as they standardize price movements over time accounting for inflation. The CPI, PPI, and GDP deflator are some of the commonly used price indices. The most appropriate index depends on whether the focus is on general inflation or cost of living for households.
Step-by-step explanation:
Economists use index numbers, such as price indices, to measure the price level because index numbers provide a way to compare price changes over time. They are standardized measurements that illustrate how the prices of selected goods and services have moved in relative terms. Dollar values alone do not account for the effects of inflation over time, which can make comparisons between different years misleading.
Price indices are calculated by organizations such as the Bureau of Labor Statistics (BLS). The Consumer Price Index (CPI) is one of the most commonly used indices to measure inflation and the cost of living. It tracks the prices of a fixed basket of goods and services purchased by a typical urban consumer. The Producer Price Index (PPI) records the prices paid for supplies and inputs by producers, and the GDP deflator is an index that captures the prices of all goods and services included in GDP. Alternatives like the Billion Prices Project by MIT offer a more recent data collection method for price measurement.
Choosing the 'best' measure of inflation depends on the specific application: GDP deflator is the most comprehensive, reflecting the prices of all goods and services produced in the economy, while the CPI is tailored to reflect the cost of living for households, tracking the prices of goods and services that households actually purchase.