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CPI Calculation

The document outlines methods for measuring inflation, focusing on the Consumer Price Index (CPI) and its construction. It details the steps for calculating CPI using a sample of household goods, including the calculation of weighted average prices and inflation rates over time. An example is provided to illustrate the calculation of inflation from 2001 to 2002 and from 2002 to 2003 using a specified basket of commodities.

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Aarav Gokul
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2 views3 pages

CPI Calculation

The document outlines methods for measuring inflation, focusing on the Consumer Price Index (CPI) and its construction. It details the steps for calculating CPI using a sample of household goods, including the calculation of weighted average prices and inflation rates over time. An example is provided to illustrate the calculation of inflation from 2001 to 2002 and from 2002 to 2003 using a specified basket of commodities.

Uploaded by

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

4.8.

2 measurement of inflation and deflation


How to measure inflation?
There are different methods of measuring inflation. The most common methods are Consumer price Index
and retail price index.
Consumer price Index(CPI)
Meaning of CPI
Price indices measure average prices in one period relative to average price in reference period called base
period over [Link] consumer price index expresses the current prices of a basket of goods and
services in terms of the prices during the same period in a previous year/base year , to show effect of
inflation on purchasing power of people.

CONSTRUCTION OF SIMPLE CPI


Method 1
Steps:
[Link] to calculate for all goods in economy. Take samples of house hold from
population.
2. Goods purchased by a typical family /typical basket is considered.
3. Find average price of goods/service from a small number of retail units including online
units
4. Multiply the proportion of expenditure with average price(weightage ) /quantity of goods
consumes to find out weighted average price to find the impact of [Link] is called
weightage .
[Link] total weighted average prices adding weighted average price of all commodities in
consumption basket .
[Link] the CPI for the current year by using the formulae
CPI in year 1 = Weighted average price year 1 X 100
Weighted average price of base year
7. Consider base year CPI value is 100
[Link] out the difference between base year CPI and current year CPI.
[Link] will help us to find out what households are spending to get same thing we bought in
earlier periods.
[Link] will give the inflation rate of the country compared to base year .
using the price index inflation can be calculated form one year to the other
rate of inflation = final value of a (CPI current year – initial value of a(CPI of previous year *100
initial value of A
Ex1 – calculate inflation from year 2001 to 2002
Commodity Quantity Price 2001 Price 2002 Price 2003
Burger 37 3 4 5
CD 25 15 14 15
Haircut 15 18 20 21

Value of basket in base year = 37* 3 + 25* 15 + 15* 18 = 756


Value of basket in 2002 = 37* 4 + 25* 14 + 15* 20 = 798
Value of basket in 2003 = 185+375+315 =875
Price index for base year = 756 * 100 = 100
756
Price index for 2002 = 798 * 100 = 105.5
756
CPI for 2003 = 875 * 100 = 115.7
756
change in price level = 115.7 – 105.5 * 100 = 9.6%
105.5

Commodity Quantity Price 2001 Price 2002 Price 2003

Burger 37 3 4 5 Calculate
inflation
CD 25 15 14 15

Haircut 15 18 20 21
for 2002 and 2003 ,keeping 2001 as the base year .Also calculate the change in price level from 2002 to
2003 .

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