Inflation

 Inflation (Definition)
 Inflation in macroeconomics
 Inflation and economics
school of thought
 Symptoms of Inflations
 Economist view on inflation
 Classical, Keynesian and
monetarist school of thought
 Types of Inflation
 Phillips Curve analysis
 Demand pull inflation
Demand supply model (simple)
 Cost push inflation
 Stagflation
 Inflation AD-AS model
Inflationary Gap
Deflationary Gap
 Bottleneck and structural
inflation
Inflation, Deflation,
Disinflation, Reflation

Inflation vs. Deflation
Is inflation essential for
economic growth ?
Inflation in different time frame.
Why Chinese products are
cheaper?
Who measures inflation in
India?
How we calculate Inflation?
GDP Deflator and Price index.
Base year and weighted mean
Why we not use GDP deflator as
inflation measure.
GDP Deflator & Inflation
Calculation
CPI
WPI
IIP
PPI
Real Interest Rate vs Nominal
interest rate and purchasing power
 Inflation through partial and
general equilibrium

Persistent rise in price. Or continuous increase in price. It
doesn't means crop failure or drought, war and another severe
condition.

Inflation causes
decrease in
purchasing power
of a currency.
•Inflation is a general rise in
the price level in an economy
over a period of time. When
the general price level rises,
each unit of currency buys
fewer goods and services
•Inflation leads to decrease
in purchasing power of a
money which finally slows
down the economic growth.

Inflation in macroeconomics
• When macroeconomist study the economy, they first look
at 3 variables
• Output-The level of production of an economy as a whole
and its growth rate.
• The unemployment rate-The proportions of workers in the
economy who are not employed, and are looking for the
job.
• The inflation rate- The rate at which average price of a
goods in the economy increases day by day.

Inflation(Contd.)
 What is inflation is a subject matter of a long
discussion,.
 How economists tackle inflation is depend on the
economist , which school of thought he belongs to.
 There are many school of thought, but In short I will
tell you there are 3 famous school of thought.
 The Classical school of thought.
 The Keynesian school of thought.
 And the monetarist school of thought.

Symptoms of inflation
 Abnormal rise in price level. It means price rise in a
year is around 8%-10% and above.
 Price continuously rises for 2 years or more than 2
years.
 Purchasing power of money continuously decline, year
after year.

Economist view on inflation
 Crowther- “Inflation is a state in which value of money
is falling.”
 Brooman-Inflation is continuous rise in general price
level.
 Johnson-Inflation is sustained rise in price.
 Milton Friedman-Inflation is always and everywhere
and a monetary phenomenon.
 Coulborn-Inflation is too much money chasing too
few goods.

Classical school of thought.
 Its main thinkers are Adam Smith, Jean-Baptiste Say, David
Ricardo, Thomas Robert Malthus, and John Stuart Mill.
 No Government intervention in the economy.
 Adam Smith invisible hand.
 Wage – prices are flexible.
 They believe in laissez –faire.
 They favoured free trade
 Full employment is found without inflation.
 This thought basically focuses on supply side of economy.

Keynesian School of thought.
 John Maynard Keynes and his followers like William
Baumol, James Duesenberry, John Hicks, Franco
Modigliani, etc.
 Government intervention in the economy is essential.
 Wage- price are sticky.
 Economy is not self regulating.
 Believe in short run.
 Focus on demand side of the economy.
 Full employment is an extreme condition.

Monetarist school of thought.
 Milton Friedman and others.
 Monetarist believe that money matters, monetary policy is
an effective instrument to control the inflation.
 Money growth is responsible for the inflation.
 Milton Friedman is one the most prominent.

Types of Inflation
 On the basis of increasing rate or on the basis of
speed:-
 It is of 5 types
 A) Creeping Inflation (upto 3% )
 B) Walking Inflation (4%- 8%)
 C) Running Inflation (9%-18%)
 D) Galloping Inflation (19%- 50%)
 E) Hyper Inflation ( More than 50%, can be 100%,
1000%, or more. No limit of price rise.)

Inflation on the basis of increasing
rate
Creeping inflation-It is the initial stage of inflation price
rises at slow rate. According to many economist, slow rise
in price is necessary for economic progress. It prevents the
economy to falling into a stagnant trap.(upto 3%)
Walking inflation - It is not a major problem, but central
bank will increasing concern about it.(4%-8%)
Running inflation – It is warning signal for an
economy(9%-18%)
Galloping inflation is also known as jumping inflation. In
the words of Baumol and Blinder, “Galloping
inflation refers to an inflation that proceeds at an
exceptionally high.” Galloping inflation has adverse effect
on middle and low income groups in the society.

Inflation: On the basis of increasing
rate
Hyper Inflation- When monetary authorities lose control on running inflation,
it is result of hyper inflation.
• It is the last stage of inflation, where there is no limit of price rise. In this
stage, prices rise at a very high speed.
• Hyper inflation must be avoided at any cost. It creates a huge disorder in
economic process.
• Example Germany, Zimbabwe, Germany (A case study).

Inflation on the basis of coverage
 On the basis of coverage inflation is of two types
Comprehensive or Economy wide inflation:
Comprehensive inflation is when the prices of all
commodities rise in the entire economy.
Sporadic Inflation: When the prices of a few
commodities in some areas rise, it is called
as sporadic inflation. It is sectional in nature.
Example: Hike in price of car market.

Inflation: On the basis of degree of
control.
On the basis of degree of control, inflation may be
classified in open and suppressed inflation.
1. Open inflation: Inflation is called open when prices
increase continuously without any obstacle or control.
In words of Milton Friedman, "It is an inflationary
process in which prices are allowed to increase without
stopping through governmental price control and
mixed techniques." At the end, it may end in hyper
inflation

control.
2. Suppressed inflation: Under such kind of inflation, though
there are conditions of prices rising, but by use of
government policies like price control and rationing, price
level is not allowed to increase.
Basically it is controlled by government monetary and
fiscal policy of the Government. And a policy mix.
A policy mix is the combination of fiscal and
monetary policy that a country uses to manage its
economy.

control.(Continued.)
Different- different macroeconomic model are used for
controlling the inflation.
Example: Keynesian cross model, he lead the concept of
inflationary gap and deflationary gap.
Aggregate demand- aggregate supply model.
Popular IS-LM model or Hicks–Hansen model,
developed by Sir John Richard hicks and Alvin Harvey
Hansen.
Phillips curve analysis
Policy makers control inflation using these theories.

control.(Continued.)
Phillips curve analysis- A trade off between inflation and
unemployment in the short run.
Not in a long run as suggested by Milton Friedman.

control.(Continued…) Phillips Curve
Phillips curve :-The Phillips curve is an economic
concept developed by A. W. Phillips stating that
inflation and unemployment have a stable and inverse
relationship.
The theory claims that with economic growth comes
inflation, which in turn should lead to more jobs and
less unemployment.
However it could not answer phenomenon of
stagflation.( inflation+ unemployment) in 1970. When
many countries experienced high levels of both inflation
and unemployment also known as stagflation

control.(Continued..) Phillips Curve
Phillips curve was based on adaptive expectations. It
means that when you make forecast on the basis past
decision only. We use past trend only and predict the
future using the data.
A.W.Phillips wrote a paper in 1958 titled The Relation
between Unemployment and the Rate of Change of
Money Wage Rates in the United Kingdom, 1861-
1957, He used data of these period
Rational expectations: a when forecasts of future
values are made using all available information.

control.(Continued..) Rational
Expectation.
 This lead to the development of rational expectation
Hypothesis. When economist start consider rational
expectation in their macroeconomic model while
using policy making. Like expected price and expected
inflation.
 This way of modeling expectations was originally
proposed by John F. Muth (1961)and later became
influential when it was used by Robert Lucas Jr.

Inflation: On the basis of cause
 Credit Inflation- Credit multiplier increase amount of
money. This lead to inflation.
 Currency Inflation- : Inflation created by excessive
flow of currency is called currency inflation. It occurs
when central bank of a country issue more currency in
circulation.
 Deficit induced inflation-When the government
budgetary policy is deficit. It means that revenue is
less than expense. To meet this government increases
money supply or it mobilizes private saving this will
lead inflation. It is also called budget inflation.

Inflation: On the basis of cause
Demand Pull inflation- Inflation due to increase in
aggregate demand is called demand pull inflation.
Cost push inflation-Inflation occurs due to increase in
cost of input or raw materials.
Stagflation- Inflation+ Unemployment.
Phillips curve cannot explain it.
Structural and bottleneck inflation

Demand pull inflation
 Before that you have to understand simple demand
supply model in microeconomics.

Demand –supply model (exception)
Condition-I
You have to consider that good is normal , it should not be
Veblen and giffen goods.
Examples of Veblen goods include designer jewellary,
wachts, and luxury cars. The demand curve for a Veblen
good is upward sloping,
Giffen goods are rare forms of inferior goods that have no
ready substitute or alternative such as bread, rice, and
potatoes. The only difference from traditional inferior
goods is that demand increases even when their price rises,
regardless of a consumer's income. The demand curve is
upward sloping.

Demand – supply model
 Condition-II
Ceteris paribus condition means holding other things
remaining constant. It means that we consider only
equilibrium price and equilibrium quantity
Condition-III
Partial equilibrium analysis not a general equilibrium
analysis
Partial equilibrium analysis examines the effects of
particular sector or market which is directly affected,
ignoring its effect in any other market or industry

 Simple demand supply model shows that Supply curve
is upward sloping and the demand curve is downward
sloping. Vertical line represents price and horizontal
line represents quantity

Why demand curve is downward sloping?
Because people are demanding less quantity at higher
price. As the price decreases people are demanding
more quantity.
Why supply curve is upward sloping?
Because producer supply more quantity when price of a
product rises. Higher the price, the producer has more
profit, so new producer can also come into the market
or the older producer will produce more when he will
get more price of a commodity.

Equilibrium rate and equilibrium quantity is decided
when supply curve cuts the demand curve. As shown
in the figure p is the equilibrium price and q is the
equilibrium quantity.

 Aggregate demand and aggregate supply model.
 Equilibrium price and equilibrium quantity is defined
where aggregate demand and aggregate supply cuts
each other

 Component of aggregate demand AD is C+I+G+NX.
 Where C is consumption function, I is private
investment, G is government expenditure and NX is
net export.
 When price is increases by increase in aggregate
demand it is called demand pull inflation

Cost push inflation
 Cost Push Inflation: Cost push inflation is created
when price of raw material, intermediate goods
increases and there will be increase in labour costs of
productions of the industries.
 Many factors are responsible for upward movement in
costs.
 Higher wage rate of labours, higher profit margin of
producers, higher tax rate, tax burden goes to the
consumers,

Stagflation
 The economy has an aggregate demand curve. Aggregate
demand refers to the total goods and services in the
economy that are demanded in the economy that year at
different price levels. This is the downward sloping curve.
 In the same way, there is an aggregate supply curve, it is
upward sloping. Equilibrium price decided where both of
them cut each other. Y Axis represent Price and X Axis
represents GDP. In the case of stagflation the aggregate
supply curve shifts leftward. Due to which the price also
increases and GDP and Employment goes down.

Stagflation
 Stagflation was first recognized during the 1970's,
where many developed economies experienced rapid
inflation and high unemployment as a result of an oil
shock.
 Since the 1970's, rising price levels during periods of
slow or negative economic growth have become
somewhat of the norm rather than an exceptional
situation.

Inflation AD-AS model(Diagram)

Keynesian cross model
 Aggregate expenditure or aggregate demand =C+I+G+NX,
 A 45 degree line shows Aggregate supply. Equilibrium is
decided when aggregate expenditure cuts Aggregate
supply. GDP is decided at X-axis.

Inflationary gap
 Inflationary gap: Aggregate demand > Aggregate
supply (at full employment level)

Deflationary gap
 Deflationary gap: Aggregate demand < Aggregate
supply (at full employment level)

Bottle neck inflation: It is the inflation that takes place
when supply falls drastically and demand remains at
same level. This creates excess demand in the economy
as the supply cannot match with it and thus prices rise.
Such situations arise due to supply-side accidents,
hazards or mismanagement.
Structural Inflation:-
Structural Inflation is another form of Inflation mostly
prevalent in the Developing and Low-Income
Countries due to weak structure of their economy.

It was given by Gunnar Myrdal and Paul Streeten
THEY EXPLAINED INFLATION IN TERMS OF
DEVELOPING COUNTRIES LIKE LATIN AMERICA
AND INDIA.
The structural theory explains three types of
bottlenecks:
1. Agricultural bottlenecks
2. Government Budget constraint bottlenecks.
3. Foreign Exchange Bottlenecks

Agricultural bottlenecks
 In developing countries food grains production do not
increases due to bottleneck in agriculture , so,
agricultural output is inelastic to rising income.
 Bottlenecks in agriculture includes
 a) disparity in land ownership and defective land
tenure system.
 b) use of primitive technology in agriculture.
 c) lack of knowledge and access to finance.

Agricultural bottlenecks
d) dependency on weather
e) low agricultural infrastructural facilities
So food supply increases relatively less than increase in
demand on account of increasing population or
income. » AD>AS » gap » price rises » inflation
Further hoarding accentuates the prices up.

Government Budget constraint
bottlenecks
Budget deficit leads
A)Expenses side- Defense, agriculture, industries,
infrastructure, PSU, require huge amount to run.
B) Revenue side-Low tax base, large scale tax evasion,
inefficient and corrupt tax administration.
C) Insufficient external borrowings, grants and aids.
Lead to deficit financing » Ms (AD) » Output(GDP) do
not increases(AS) » gap between demand and supply
increases AD>AS » pushes the prices up » inflation.

Foreign Exchange Bottlenecks
LDCs are characterised by shortage of foreign exchange
or currency due to:
a) Dependency on import for their developmental
activities like— capital goods, industrial raw material
etc,
b) Exports of these nations are low due to low exportable
surplus, poor quality product, restrictive world trade
policies
It means, import >export ; payment > earning

Foreign Exchange Bottlenecks
To fill this gap b/w export and import,
LDCs opt 1. restrictive import policies ---- to reduce
import 2. devaluation of currency----- to increase
export
Both of these measures lead to rise in price in the
domestic nation.
Both lead to inflation (demand pull inflation
domestic and foreign demand)

These are interrelated terms which are quite confusing, for
learning this terminology, you have to understand the concept
of business cycle.
Business cycle is a big topic, different economist has expressed
their view on the business cycle.
We are not going into the discussion of business cycle given by
John Maynard Keynes, Nicholas kaldor, J.R. hicks, Paul
Samuelsson, Schumpeter, Goodwin, Milton Friedman and other
economist.
We only have to discuss about the phases of the business cycle.

Business Cycle
 Economy of an any country is not in a steady state, it
always moves. (Don’t confuse with Solow model of
steady state that is another topic).
 Business cycle- it is simply fluctuation in GDP with
respect to time.

Inflation, Deflation, Disinflation,
Reflation

Reflation
 What is disinflation?
 Disinflation is a decrease in the rate of inflation – a
slowdown in the rate of increase of the general price level
of goods and services over a period of time.
 For example if the annual inflation rate for the month of
January is 5% and it is 4% in the month of February, the
prices disinflated by 1% but are still increasing at a 4%
annual rate.
 What is deflation?
 Deflation is a decrease in the general price level of goods
and services.
 Deflation occurs when the inflation rate falls below 0%.

Reflation
Reflation- Reflation is the act of stimulating the
economy by increasing the money supply or by
reducing taxes, seeking to bring the economy back up
to the long-term trend, following a dip in the business
cycle. It is the opposite of disinflation, which seeks to
return the economy back down to the long-term trend.
It is the opposite of disinflation, which seeks to return
the economy back down to the long-term trend.

Inflation vs. Deflation
 If inflation is so bad, does this imply that deflation
(negative inflation) is good?
 The answer is no.
 First, high deflation (a large negative rate of inflation)
would create many of the same problems as high inflation,
from distortions to increased uncertainty.
 Second, as we shall see later in the book, even a low rate of
deflation limits the ability of monetary policy to affect
output.
 So what is the ‘best’ rate of inflation? Most
macroeconomists believe that the best rate of inflation is a
low and stable rate of inflation, somewhere between 0
and3%.(It doesn’t mean 0%, it should be more than 0%)

Is inflation essential for economic
growth ?
 It is just like an air in the vehicle tyre , if it is low , the
economy of a country cannot run and if it is high,
again the tyre may burst, the same thing happen with
the economy . It will not move or run.

Is inflation essential for economic
growth ?
Proper air is required to move the wheel, similarly proper amount
of inflation is required to move the economy.
 Workers wants salary should hike after a period of time.
 Landlord want their rent should be increase.
 Similarly the producer wants the price will rise so that he will
earn profit.
 Even central bank of any country also desires inflation. In india it
is RBI

Inflation in different time frame.
 Time frame are most important frame in the
economics.
 These are short run , medium run and long run.
 In short run, say a few year, the movement of price and
output is primarily driven by the movement in the
demand function. Or the Aggregate demand.
 Changes in demand, perhaps due to changes in
consumer confidence or other factors, can lead to a
decrease in output (a recession) or an increase in
output (an expansion). And increase in
price(inflation) or decrease in price(deflation).

Inflation in different in frame.
 In the medium run, say, a decade(10 years) Over the
medium run, the economy tends to return to the level of
output determined by supply factors: the capital stock, the
level of technology and the size of the labour force. And,
over a decade or so, these factors move sufficiently slowly
that we can take them as given.
 In the long run, say, a few decades or more, the output and
price level are determined by the level of capital
accumulation, technology, capital output ratio and human
capital.
 Human capital plays a big role in the economy.(specialist)

Why Chinese products are
cheaper?
 To under-stand why China has been able to achieve
such a high growth rate since 1980, we must
understand why both capital and the level of
technology in China are increasing so fast. To do so, we
must look at factors such as the education system, the
saving rate, and the role of the government.
 Because the latest technology, and human capital will
increase the level of production, which ultimately
leads to increase in the output and decrease in price as
well as reduce in the cost of manufacturers.
 However china practice dumping.

Why Chinese products are
cheaper?
 Dumping occurs when a country or company exports
a product at a price that is lower in the foreign
importing market than the price in the exporter's
domestic market.

Who measures inflation in India?
 It is measured by MOSPI.
 Ministry of statistics and program implementations.
 The Ministry of Statistics and Programme
Implementation (MOSPI) came into existence as an
Independent Ministry on 15.10.1999 after the merger of
the Department of Statistics and the Department of
Programme Implementation.
 It has two wings, one relating to Statistics and the
other Programme Implementation.

How we calculate Inflation?
GDP Deflator, Price index.
 Inflation is calculated in two ways:
 First one is GDP Deflator.
 Second One is Price Index, Whether it will be CPI,
WPI,PPI, IIP, etc.
 It is calculated through the concept of index number
and weighted mean.
 Price index consists of
 A basket of goods-It contains goods and services
from various sectors of the economy. There prices are
monitored over a period of time.

(Base Year)
 Base year-This is the first year with which the prices
of subsequent years are compared. The price of each
commodity is given the value of 100. The base year
chosen is a typical year in the sense that there is
neither very low or very high inflation, nor any
extraordinary occurrences like wars.

Weight and weighted mean
 Some commodities are more important in the economy as
compared to other commodities.
 To find out the true effect of inflation. Weights are added
to different products and services according to their
importance in the society.
 A product which has a more serious affect is given a higher
weight. For example food products which form a staple diet
of the society are assigned more weightage than luxury
products (perfumes).
 As the pattern of consumers spending changes over time so
the Price Index will have to change the weights assigned to
different commodities.

Mean and weighted mean
 Suppose in the examination you got 80% marks in
theory and 90% marks in the practical.
 The average (80%+90%)/2= 170%/2=85%
 Now think another aspect (80%+90%)/2
 (80%/2+90%/2) or you can say that ½(80%)+1/2(90%)
 You can say that 1 = 100% or ½=50% here the weighted
is 50% of both marks . Because these are equal.

Weighted mean
 Suppose in the examination you got 80% marks in
theory and 90% marks in the practical.
 But here weight assigned for theory is 80% and weight
assigned in practical is 20%.
 As you know that the value of 80% is 0.8 and value of
20% is 0.2
 Multiply it by initial value i.e.{(80X0.8)+ (90X0.2)}%
 {(64)+(18)}% or 82%
 Here you can see that the average value is shifted
towards 80% because its weight is more.

GDP Deflator
 GDP deflator is also known as implicit price deflator.
 GDP Deflator=Nominal GDP/Real GDP
 It measures the impact of inflation on the GDP of an
economy during the period of a fiscal year.
 GDP deflator is a much broader and comprehensive
measure than CPI and WPI.
 The GDP deflator also includes the prices of
investment goods, government services and exports,
and excludes the price of imports.

Why GDP deflator is not used as
inflation measures ?
1) It excludes imported items.
2) WPI and CPI are available on monthly basis whereas
GDP deflator comes with a lag (yearly or quarterly,
after quarterly GDP data is released). Hence,
monthly change in inflation cannot be tracked using
GDP deflator.

Nominal GDP
 Suppose GDP of a country A is 10 million in 1980 and 1
billion in 2020. Can we say the economy of that very
country is 10 times from today?
 The answer is no
 Because in these time price has also increased, and it is
measured by inflation rate. And the price of a
commodity is not same when it was measured in 1980
and now when it is measured in 2020.
 Nominal GDP is sum of GDP multiplied by current
price not the price of previous year or base year.

Base Year(GDP)
 The base period or base year refers to the year in which
an index number series begins to be calculated. This
will invariably have a starting value of 100.
 The last series has changed the base to 2011-12 from
2004-05.
 The Ministry of Statistics and Programme
Implementation (MOSPI) is considering changing
of base year for GDP calculation from 2011-12 to 2017-
18.

Nominal GDP & Real GDP
 GDP increases over the time for two reasons:-
a)The production of goods must increases over the time.
b) The price of goods must increased over time.
 Our main motive to know how much production has
increased over time this is called Real GDP.
 Real GDP measures how much economy has increased
over a period of time.(Base Year)
 While nominal GDP represents the total GDP at
current price.

Nominal GDP and Real GDP
 Suppose that a hypothetical economy produces two
goods only. Chicken and Fish. And base Year is 2018
Nominal GDP: GDP at Current Price
Real GDP: GDP at Constant Price or base year price
Year Price of
chicken
Quantity of
chicken
Price of fish Quantity of
fish
2018 200 100 150 200
2019 210 100 160 210
Year Nominal GDP Real GDP
2018 (200X100)+(150X200)=50000 (200X100)+(150X200)=50000
2019 (210X100)+(160X210)=54600 (200X100)+(150X210)=51500

GDP Deflator & Inflation Calculation
 GDP Deflator=(Nominal GDP/Real GDP)X100
 In year 2018,
GDP Deflator=(Nominal GDP/Real GDP)X100
(50000/50000)X100= 1X100=100
In year 2019,
GDP Deflator=(Nominal GDP/Real GDP)X100
(54600/51500)X 100
(1.060194)X 100= 106.0194
Inflation is 106.01-100.00=6.01%

CPI
 CPI (Consumer Price Index) also known as the cost of
living Index.
 Base Year, Basket of Goods and services
 Inflation=Price of current year/Price of base year X 100%
 Example= 108/100 X 100%=108%
 Base year price was 100 and current year price 108 so price
of basket of goods and services has increased by (108-100)%
or 8 %
 Introduced by raghuram rajan
 Base year is 2012

CPI(Continued..)
Six Categories of CPI
1. Food Beverage.(54.18%)
2. Miscellaneous.(27.26%)
3. Housing not included in Rural CPI
4. Pan, tobacco, intoxicants (3.26%)
5. Clothing and footwear (7.36%)
6. Fuel and light(7.94%)

CPI(Continued..)
 CPI (Consumer Price Index) also known as the cost of
living Index. It measures the average change in price paid
by a specific class of consumers. There are four series,
 the CPI UNME (Urban Non-Manual Employee), CPI
UNME series is published by the Central Statistical
Organization which is under the Central Statistics Office
is a governmental agency in India under the Ministry of
Statistics and Programme Implementation.
 CPI AL (Agricultural Labourer) is published by
the Department of Labour.

CPI (Continued..)
 CPI RL (Rural Labourer) is published by
 and CPI IW (Industrial Worker)is published by
 CPI IW (industrial workers) base year is 2016
 The Labour Bureau has started the exercise of revising
the base year for consumer price index for agricultural
and rural labours (CPIAL/RL) to 2019-20, from 1986-
87,
 Agricultural, rural labour CPI base year to be revised to
2019-20. But not revised yet.

CPI (Continued..)
 From February 2011 the CPI (UNME) released by CSO
is replaced as CPI (urban), CPI (rural), and CPI
(combined).
 Price data are collected from selected towns by the
Field Operations Division of NSSO and from selected
villages by the Department of Posts. Price data are
received through web portals being maintained by the
National Informatics Centre (NIC).

Why we need CPI?
 The GDP deflator gives the average price of output –
the final goods produced in the economy – but
consumers care about the average price of
consumption – the goods they consume.
 Some of the goods in GDP are sold not to consumers
but to firms (machine tools, for example), to the
government or to foreigners.
 Some of the goods bought by consumers are not
produced domestically but are imported from abroad.

CPI in different-different Country
 In the USA, the CPI has been in existence since 1917
and is published monthly.
 In Europe, the price index which is most frequently
used is the harmonised index of consumer prices, or
HICP,
 HICP is measured by Eurostat, the Statistical Office of
the European Communities.
 The HICP gives com-parable measures of inflation in
the euro area, the EU, the European Economic Area
(EEA, which includes Norway, Iceland and
Liechtenstein, besides the EU) and for other countries

CPI in different-different Country
 In the USA, BLS ,bureau of labour and statistics
publishes monthly.
 In the UK, ONS, Office for national statistics publishes
monthly.

WPI
 Here wholesale price are considered not retail price are
considered.
 In India, this basket is composed of three groups:
Primary Articles (22.62% of total weight),
 Fuel and Power (13.15%) and
 Manufactured Products (64.23%).

WPI
 Calculation number is 100 in weighted mean
 Base year is 2011-2012
 There are 3 category primary , fuel and manufacturing
 Primary-
 Laspeyres Index formula is called headline WPI
 Core inflation WPI= Headline inflation WPI-(Food
and Fuel
 It is calculated by office of economic advisor under
ministry of commerce and industry.

IIP
 Manufacturing (77.63%), mining(14.37%) and
electricity(8%).
 The eight core industries include coal, crude oil, natural
gas, refinery products, fertilizers, steel, cement and
electricity. These are called core industries because of their
likely impact on general economic activity as well as other
industrial activity.
 In the case of Index of Industrial Production India, IIP data
is compiled and published by CSO every month. CSO or
Central Statistical Organisation operates under
the Ministry of Statistics and Programme
Implementation (MoSPI).
 Base year for IIP is 2011-2012

PPI
 PPI, or producer price index, which is an index of
prices of domestically produced goods in
manufacturing, mining, agriculture, fishing, forestry
and others. It excludes tax.
 The Producer Price Index or PPI is an index used to
calculate the movement of price from the seller’s point
of view.
 In India PPI haven't been in use yet, NITI Aayog have
created a roadmap to introduce PPI soon.

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