A price index can be computed by
A) dividing a nominal variable by its real counterpart.
B) dividing a real variable by its real counterpart.
C) subtracting the nominal variable from its real counterpart.
D) subtracting the real variable from its nominal counterpart.

Question

Quizplus · Accepted Answer

A price index is computed by dividing a nominal variable (such as price) by its real counterpart (adjusted for inflation). This gives a measure of how much the price has changed over time, independent of inflation. Option B is not correct as dividing a real variable by its real counterpart would give a value of 1, which is not informative. Option C and D are also not correct as subtracting the nominal or real variable from its counterpart would not give a meaningful measure of price changes over time.

A Price Index Can Be Computed by