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Introduction To Inflation.

The document discusses inflation, defining it as a steady rise in general price levels over time, and explains how it is measured using the Retail Price Index (RPI) and Consumer Price Index (CPI). It outlines the process of calculating these indices by selecting a market basket of goods, recording their prices, and computing the average change. Examples of calculations for RPI and CPI are provided to illustrate how inflation rates are determined.

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5 views4 pages

Introduction To Inflation.

The document discusses inflation, defining it as a steady rise in general price levels over time, and explains how it is measured using the Retail Price Index (RPI) and Consumer Price Index (CPI). It outlines the process of calculating these indices by selecting a market basket of goods, recording their prices, and computing the average change. Examples of calculations for RPI and CPI are provided to illustrate how inflation rates are determined.

Uploaded by

prakashdeonarine2020
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

ECONOMICS

ECONOMIC MANAGEMENT: POLICIES AND


GOALS
SUB TOPIC: INFLATION, RECESSION AND
UNEMPLOYMENT
ECONOMICS

Inflation is defined as the steady and continuous rise in general price level (that is, an average
of all prices in the economy).

A one-off increase in price is not inflation. Prices must rise steadily and over a prolonged period
for it to be considered as inflation. An increase in a small number of prices does not constitute
inflation either.
Inflation is measured by a rise in the retail price index(RPI) from year to year. The retail price
index is computed by measuring the change in prices of a given `basket` of goods that consumers
buy.

In the first stage, each good in the basket is given a weight based on how much consumers spend
on that good. Next, changes in the prices of the goods in the basket are recorded.

Finally, the change in prices is multiplied by the weight for that good and then an average change
in the price level is computed.

Retail Price Index

2021

Milk ​ ​ ​ Eggs ​ ​ ​ Bread ​ ​ ​ Sugar

$7 x4 =$28​ ​ ​ $6 x3 =$18​ ​ ​ $10x6 =$60​ ​ $15x2=$30

$136/136*100=100 Base Year.

2022

Milk ​ ​ ​ Eggs ​ ​ ​ Bread ​ ​ ​ Sugar

$8 x4 =$32​ ​ ​ $10 x3 =$30​​ ​ $11x6 =$66​ ​ $16x2=$32

$166

$166/136*100= 122

100-122=22%

Consumer Price Index

measures changes in the prices for market basket of goods/services (Shows inflation).

In order to calculate :

1.​ select a base year = 100.


2.​ select the market basket.
3.​ record prices for items in the basket.
4.​ computation.
Year Market Basket CPI Inflation Rate

2015 15 75 NA

2016 (Base year) 20 100 33.3

2017 30 150

2018 35 175

2019 40 200

2020 45 225

Calculating Consumer Price Index.

VALUE OF CURRENT MARKET BASE​​ ​ X 100

VALUE OF MARKET BASKET IN BASE YEAR

Year 2015

15/20*100=75 (consumer price index).

Calculating Inflation Rate

% change in Price

Year 2-Year 1

Year 1​​ X100

100-75

75​ ​ X100

=33.33%

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