Importance of Consumer Price Index (CPI)/ Cost of Living Index, Difficulties in Construction of CPI

 

🚩Timestamps:-

01:03 IMPORTANCE OF THE CONSUMER PRICE INDEX OR COST OF LIVING INDEX

09:51 DIFFICULTIES IN THE CONSTRUCTION OF CONSUMER PRICE INDEX

13:45 Concluding Remarks

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.

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IMPORTANCE OF THE CONSUMER PRICE INDEX OR COST OF LIVING INDEX, DIFFICULTIES IN THE CONSTRUCTION OF CONSUMER PRICE INDEX | Index Numbers | 11th Commerce | by @statomics11comm

 

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