CONSUMPTION AND DEMAND-SIDE ECONOMICS<br />Sub-topic:<br />Consumer Price Index (CPI)<br />
PRICE STATISTICS <br /><ul><li>Price statistics includes collection of retail and whole sale prices and computation of following indices:</li></ul>1. Consumer price index (C.P.I)<br />2. Wholesale price index (W.P.I)<br />3. Sensitive price indicator (S.P.I)<br />
Price Index<br /> =a normalized average of prices for a given class of goods<br /> or services in a given region, during a given interval of time<br />
Consumer Price Index(CPI)<br /><ul><li>main measure of price changes at the retail level
measures changes in the cost of buying a representative fixed basket of goods and services
generally accepted as a measure of inflation in the country</li></li></ul><li>WHOLE SALE PRICE INDEX (WPI)<br /> ….designed to measure the change of price in the primary and wholesale markets<br /> <br />
SENSITIVE PRICE INDICATOR (SPI)<br /> …designed to assess price movement of essential consumer items at short intervals (on weekly basis ).<br />
Why Three Types of Indices?<br /><ul><li>CPI measures Inflation rate in the country
SPI is computed to assess the price movement of essential commodities at short interval of time to review the price situation in the country.
WPI measures the General Price level in the whole sale market. </li></li></ul><li>Functions of CPI<br />=used most widely as measure of inflation <br />=viewed as an indicator of the effectiveness of government economic policy<br />=provides information about price changes in the Nation's economy to government, business, labor, and private citizens <br />=guides the president, senate & congress in making economic decisions<br />=shows trends in the CPI to aid in formulating fiscal and monetary policies.<br />
What does CPI measure?<br /><ul><li>It measures Price changes of fixed market basket of goods and services of constant quality and quantity.
It tells how much cost of living has risen or fallen due to price changes irrespective of changes in consumer behavior or quality of goods.
It does not reflect the cost of living or in house hold consumption expenditure as such but only the influence of price fluctuation on the trend. </li></li></ul><li>FORMULA USED FOR CPI<br />Laspeyre's formula as given below is being used for the computation of CPI.<br /> (Pn/Po) x wi <br />In = --------------------- x 100 <br />wi <br />Where: In = CPI for the nth period <br />Pn= price of an item in the in the nth period <br /> Po = price of an item in the base period <br />wi = weight of the ith item in the base period = Po x qo / Po x Qo <br />wi = Total weight of all items. <br />
EXAMPLE FOR COMPUTATION OF CPI<br />ITEM<br />UNIT<br />BASE PRICE (Po)<br />PRICE IN MAR, 06 (Pn)<br />WEIGHT (Wi)<br />Pn / Po<br />Po / Pn x Wi<br />Moong Pulse<br />Kg<br />29.91<br />47.61<br />0.2230<br />1.5918<br />0.3550<br />Mash Pulse<br />Kg<br />45.01<br />52.72<br />0.2017<br />1.1713<br />0.2363<br />Masoor Pulse<br />Kg<br />36.23<br />44.03<br />0.2214<br />1.2153<br />0.2691<br />Gram Pulse<br />Kg<br />28.99<br />31.50<br />0.4272<br />1.0866<br />0.4642<br /> <br /> <br /> <br /> <br />1.0733<br /> <br />1.3246<br />( Pn/Po) x Wi<br /> Index = -------------------------------- x 100<br />Wi<br /> <br /> 1.3246<br /> I = -------------------------- x 100 = 123.41<br /> 1.0733<br /> <br />
Limitations of CPI<br />Coverage is limited.<br />Only covers urban areas.<br />Prices may have different trend in rural & urban areas.<br />Rent is computed through construction input items index instead of rent survey.<br />It measures partially inflation not total consumer’s expenditure.<br />
Inflation Rate Definition <br />In mainstream economics, the word “inflation” refers to a general rise in prices measured against a standard level of purchasing power. Previously the term was used to refer to an increase in the money supply, which is now referred to as expansionary monetary policy or monetary inflation. <br />Inflation is measured by comparing two sets of goods at two points in time, and computing the increase in cost not reflected by an increase in quality. There are, therefore, many measures of inflation depending on the specific circumstances. <br />