Consumer Price Index (CPI) or Cost of Living Index Number, Construction, Methods | Index Numbers
🚩Timestamps:-
00:07 Session Agenda
00:32 to be discussed in next video…
01:23 Consumer Price Index or Cost of Living Index Number
06:54 CONSTRUCTION OF CONSUMER PRICE INDEX
11:46 METHODS OF CONSTRUCTING CONSUMER PRICE INDEX (CPI)
12:07 Concluding Remarks
Learning Outcomes:-
Through this module, you will gain understanding
on:-
1.
Consumer
Price Index or Cost of Living Index Number
2.
CONSTRUCTION
OF CONSUMER PRICE INDEX
3.
METHODS
OF CONSTRUCTING CONSUMER PRICE INDEX (CPI)
4.
(i) Aggregative Expenditure Method
5.
(ii)
Family Budget Method.
6.
IMPORTANCE
OF THE CONSUMER PRICE INDEX OR COST OF LIVING INDEX
7.
DIFFICULTIES
IN THE CONSTRUCTION OF CONSUMER PRICE INDEX
Consumer Price Index or Cost of Living Index
Number (representative of consumption
expenditure in an economy)
So far we have been
focusing on general price indices. But these indices do not precisely explain
how the change in general price level affects the cost of living of the various
classes of society. This is because different classes of people consume
different goods and services. Accordingly, the change in prices affect them
differently.
·
To know the
effects of changing prices on the living of different classes of society, we
need a special type of price index, called Consumer Price Index or Cost of
Living Index Number.
·
The consumer
price index is the index number which measures the average change in prices
paid by the specific class of consumers for goods and services consumed by them
in the current year in comparison with base year. Change in the price level
affects the cost of living of the concerned class of consumers. Accordingly, consumer
price indices are also called cost of living indices.
In India, the consumer
price indices are mainly constructed for the following consumer groups:
(i) Industrial Workers
(ii) Urban-Non Manual Employees (UNME), and
(iii) Agricultural
Labourers
CONSTRUCTION OF CONSUMER PRICE INDEX
(1) Selection of the Consumer Class:
Consumers
are classified into various classes like industrial labour, government
employees agricultural labour, teachers, etc. We should select the class of
consumer according to the requirement of our study.
(2) Information about the Family Budget:
After
the decision about the group, a sample of persons should be selected from the
group and following information about their family budgets should be obtained:
(i) Commodities which they consume. (ii) Quantity of consumption. (iii) Prices
of the concerned goods and services. (iv) Money spent on these goods and
services. The items which are generally consumed may be classified in groups
like (i) Food, (ii) Clothing, (iii) Fuel and light, (iv) House rent, (v)
Education, health and sanitation, (vi) Miscellaneous.
(3) Choice of Base Year:
The
base year should be the year of economic stability. It should not be too
distant from the current year.
(4) Information about Prices:
The
retail prices of selected items/commodities should be collected from the region
where the group of selected person lives and makes the purchases.
(5) Weightage:
The
importance of various items for different classes of people is different.
Therefore, the selected items should be given weights according to their
relative importance. As discussed earlier, there are two ways of according
weights:
(i)
Quantity Weights: These weights are given in proportion the quantities consumed
in the base period.
(ii) Expenditure Weights: These weights are
given in proportion to the total expenditure on the items consumed in the base
period.
METHODS OF CONSTRUCTING CONSUMER PRICE INDEX
(CPI)
(i) Aggregative Expenditure Method
(ii) Family Budget Method.
IMPORTANCE OF THE CONSUMER PRICE INDEX OR
COST OF LIVING INDEX
(1) Formulation of Price Policy:
The
consumer price indices are used by government to frame policies on prices. On
the basis of these indices, government decides whether the prices are to be
controlled, dual price policy should be adopted or public distribution system
is to be introduced, etc. Also, government policies like rent control and
taxation, general economic and fiscal policies etc. are framed on the basis of
the consumer price index numbers to a large extent.
(2) Wage Adjustment:
Cost
of living index numbers are used as basis for the wage adjustments. The rates
of dearness allowances are decided by the government on the basis of these
indices. These indices are also used for wage contracts and wage agreements of
the workers.
(3) Measurement of Real Value:
These
index numbers are used to measure the real value of the rupee or its purchasing
power and real income (or revenue), etc.
·
The purchasing
power of money is the amount of goods and services that can be bought with a
unit of currency. It's also known as a currency's buying power.
·
Purchasing power
can decrease over time due to inflation, which causes prices to rise. For
example, if you had one unit of currency in the 1950s, you could buy more items
than you can today.
(4) Analysis of Markets:
The
consumer price indices are also used for the analysis of the market of specific
commodities for their demand and supply.
(5) National Income Deflator:
These
indices are also used as deflators of national income. Accordingly, real change
in national income is estimated.
·
The GDP deflator
is a statistical tool that measures inflation and deflation in an economy by
comparing the value of goods and services produced in a given year to the value
of the same goods and services produced in a base year. The GDP deflator is
calculated by dividing the nominal GDP by the real GDP and multiplying the
result by 100. The nominal GDP is calculated using the current year's prices,
while the real GDP is calculated using the base year's prices.
·
The GDP deflator
is also known as the implicit price deflator. It can be used to study economic
phenomena, expenditure patterns, and changes in demand and consumption. The GDP
deflator is often used in conjunction with the Consumer Price Index (CPI) to
measure inflation. (मुद्रास्फीति, महंगाई)
DIFFICULTIES IN THE CONSTRUCTION OF CONSUMER
PRICE INDEX
(1) Difference in the Standards of Living:
Consumption
pattern of different classes of consumers are different and therefore, have
different living standards. Thus, there cannot be one consumer price index
number for different classes of society.
(2) Difference in Prices:
The
price indices are constructed on the basis of retail prices. But the retail
prices vary from place to place and even at the same place from shop to shop.
As such it is very difficult to find a representative price for the calculation
of consumer price index.
(3) Difference in the Proportion of
Expenditure:
All
the members of any particular group do not spend on various items of
consumption in same ratio and even one person does not spend on various
commodities in the same ratio at two different periods of time. A consumer's
purchase ratio depends upon his/her taste, habits, etc. Accordingly, it is
difficult to construct a cost of living index that truly reflects a change in the
cost of living over time.
VIDEO DESCRIPTION (max 5,000 characters)
Consumer Price Index or Cost of Living Index Number, Price Index or Cost of Living Index Number, CONSTRUCTION OF CONSUMER PRICE INDEX, METHODS OF CONSTRUCTING CONSUMER PRICE INDEX (CPI) | Index Numbers | 11th Commerce | by @statomics11comm
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