There are two main methods to measure inflation: 1) By calculating the percentage change in price indices like the Consumer Price Index (CPI) or Wholesale Price Index (WPI). CPI measures the price of a basket of consumer goods, while WPI measures wholesale goods prices. 2) By calculating the change in the GDP deflator, which is the ratio of nominal GDP to real GDP adjusted for inflation. For example, if nominal GDP is Rs. 1740.2 thousand crores and real GDP is Rs. 1136.9 thousand crores in 1999-2000, the GDP deflator would be 153%. The percentage change in the GDP deflator from one year to the next

1. By Sujata Regoti 2013BIT039

2. Two Methods Of Measuring Inflation
1)By Percentage change in Price Index Number(PIN).
A) Consumer Price Index(CPI)
B)Wholesale Price Index(WPI)
2)By Change in GDP deflator

3. Price Index
• Market Basket : number of goods that are
representative of economy that are put together
• The cost of this basket is compared over time
• This results in Price Index

4. CPI
• A consumer price index (CPI) measures changes in the price level of a
market basket of consumer goods and services purchased by households.
• The annual percentage change in a CPI is used as a measure of inflation.

5. Example :
our hypothetical market basket is made up of movie related goods and
services.

6. Calculating Our “CPI”
• We first need to determine the base year.
• Suppose we choose the base-year to be 2006
• The quantities purchased in 2007 and 2008 are irrelevant, because we are
assuming the household buys the same market basket of goods each month.

7. Calculate Expenditures on Base-Year
Quantities (2006)
For the CPI we use “Current Prices” and “Constant Quantities”.
P2006 x Q2006 =
(12 x $8.00) Movie Tickets
(6 x $4.00) Popcorn
(10 x $2.50) Soda
= $145.00

8. Cost of the Market Basket in 2007,2008
2008:
P2008 x Q2006 =
(12 x $12.00) Movie Tickets
(6 x $5.50) Popcorn
(10 x $3.50) Soda
= $212.00
2007:
P2007 x Q2006 =
(12 x $10.00) Movie Tickets
(6 x $5.00) Popcorn
(10 x $3.00) Soda
= $180.00

9. To calculate the CPI we use the following
formula:
100
____
____

YearBasetheinesExpenditur
YearCurrenttheinesExpenditur
CPI
100
_____
_____

YearBaseinBasketofCost
YearCurrentinBasketofCost
CPI

10. Calculate the CPI for 2006
CPI2006 = (Cost of Basket2006/Cost of Basket2006) x 100
CPI2006 = (145/145) x 100 = 100
The value of the CPI is always equal to 100 in the base-year.

11. Calculate the CPI for 2007 and 2008
2008:
CPI2008 = (Cost of
Basket2008/Cost of Basket2006) x
100
CPI2008 = (212/145) x 100 =
146.21
2007:
CPI2007 = (Cost of
Basket2007/Cost of Basket2006) x
100
CPI2007 = (180/145) x 100 =
124.14

12. Calculating the Inflation Rate from the CPI
• To Calculate the inflation rate we use our growth rate formula.
100
_
__
%_ 


ValueOld
ValueOldValueNew
ChangePercent

13. Calculate the inflation rate from 2006 to 2007
and from 2007 to 2008
Inflation06-07 = [(CPI2007 – CPI2006)/CPI2006] x 100
Inflation06-07 = [(124.14 – 100)/100] x 100
Inflation06-07 = 24.14%
Inflation07-08 = [(CPI2008 – CPI2007)/CPI2007] x 100
Inflation07-08 = [(146.21 – 124.14)/124.14] x 100
Inflation07-08 = 17.78%

14. Using Wholesale price index(WPI)
• the price of a representative basket of wholesale goods.
• Now it is called producer price index(PPI)
• India about 435 items were used for calculating the WPI in base year 1993-94
while the advanced base year 2011-2012 uses 676 items.
• Calculation of inflation rate :
100
_
__
%_ 


ValueOld
ValueOldValueNew
ChangePercent

15. Using GNP deflator
• GNP Deflator is the ratio of Nominal GNP in a year to the real GNP Of
that year
• GNP Deflator=Nominal GNP/Real GNP
• Gross national product (GNP) is a broad measure of a nation's total
economic activity. GNP is the value of all finished goods and services
produced in a country in one year by its

16. In 1999-2000
Nominal GNP = Rs.1740.2 thousand crores
Real GNP (1993-94) = Rs.1136.9 thousand crores
GNP deflator(1999-2000)in % =1740.2/1136.9 X 100=153%
Nominal GNP in 2000-2001 = Rs.1819.04 thousand crores
GNP deflator(2000-2001)in % =1819.04/1136.9 X 100=160%
% change in GNP deflator is rate of inflation
Thus, Rate of inflation = 160-153/153 X 100=4.6%

17. Thank you