I learned that price level is the weighted average of prices of all goods and services in an economy. Does weighted mean that certain goods and service have different weight (in other words importance)than other goods and services like chewing gum having less weight than milk, or does weighted mean something else?
In the context of calculating the price level, "weighted" indeed refers to giving different goods and services different levels of importance. Specifically, it means that each good or service's price is multiplied by its respective weight or importance before being included in the average. This weighting is done to account for the relative significance of different goods and services in the overall economy.
For example, let's say we want to calculate the price level for a hypothetical economy with only two goods: milk and chewing gum. If we assigned the same weight to both goods, we would treat them as equally important in the price level calculation. However, if we assigned a higher weight to milk, it would signify that milk has a greater impact on the overall price level than chewing gum. Consequently, a change in the price of milk would have a more significant effect on the price level than the same change in the price of chewing gum.
In practice, determining the weights for different goods and services in the economy can be a complex task. Economists use various methods, such as surveys or statistical analysis, to estimate these weights based on factors like consumption patterns, expenditure data, or the importance of goods and services in the economy. These weights are then applied to the respective prices to calculate the weighted average and arrive at the price level.