What does 'P' represent in the equation MV = PQ?

In the equation MV = PQ, 'P' represents the average price level of goods and services within an economy. This equation is a fundamental concept in monetary economics known as the equation of exchange, where 'M' stands for money supply, 'V' is the velocity of money (the rate at which money circulates), 'Q' is the quantity of goods and services produced, and 'P' indicates the price level at which those goods and services are sold.

Understanding 'P' as the average price level is critical because it helps to gauge inflation or deflation in an economy. When the price level rises, it suggests that each unit of currency buys fewer goods and services, impacting the purchasing power of money. Therefore, it plays a key role in economic analysis, particularly in evaluating how changes in money supply or velocity can affect overall economic activity and price levels.