Inflation
is measured by use of index numbers. Index numbers expresses the cost of a
market basket of goods relative to its cost in some base period. When
constructing index numbers it is conventional to set at 100 in the base year.
is measured by use of index numbers. Index numbers expresses the cost of a
market basket of goods relative to its cost in some base period. When
constructing index numbers it is conventional to set at 100 in the base year.
The consumer price index (CPI)
The
most often quoted of all price indexes
is the retail or consumer price index (CPI) others are the producer price index
(PPI) or wholesale price index (WPI) and the implicit GDP deflator). Using the
consumer price index, inflation is measured as the percentage change in the
index number over specified period, usually one year. Generally, the inflation
rate is given as
most often quoted of all price indexes
is the retail or consumer price index (CPI) others are the producer price index
(PPI) or wholesale price index (WPI) and the implicit GDP deflator). Using the
consumer price index, inflation is measured as the percentage change in the
index number over specified period, usually one year. Generally, the inflation
rate is given as
Consequently, we can say that the price level
has risen by 16.3% percent our representative basket consisted of consumer
goods and services
has risen by 16.3% percent our representative basket consisted of consumer
goods and services
Problems
of the CPI
of the CPI
We have seen that the CPI attempts to measure
the changes in the prices of goods and services commonly consumed by
households. There are, however, some basic problems associated with the use of
the CPI to measure inflation. First, it is impossible to the individuals and
households to some particular items and assume that changes in their prices
reflect changes in the expenditure of households. This is because
individuals/households generally substitute one good whose price is rising for
another with a fairly stable or moderately rising price. In addition, price
data used to calculate the CPI may not reflect what consumers actually paid.
the changes in the prices of goods and services commonly consumed by
households. There are, however, some basic problems associated with the use of
the CPI to measure inflation. First, it is impossible to the individuals and
households to some particular items and assume that changes in their prices
reflect changes in the expenditure of households. This is because
individuals/households generally substitute one good whose price is rising for
another with a fairly stable or moderately rising price. In addition, price
data used to calculate the CPI may not reflect what consumers actually paid.
In periods of recession and general economic
hardship, consumers may be able to buy goods at prices lower than the posted
price normally used for calculating the CPI, as a result of more effective
bargaining. Finally, the CPI does not reflect changes in the quality of each
item under consideration but only changes in their prices.
hardship, consumers may be able to buy goods at prices lower than the posted
price normally used for calculating the CPI, as a result of more effective
bargaining. Finally, the CPI does not reflect changes in the quality of each
item under consideration but only changes in their prices.
Wholesale
or Producer Price Index (WPI)
or Producer Price Index (WPI)
The wholesale or producer price index measure
prices that producers receive for products at all stages in the production
process, and not just final goods and services. The indices are calculated
separately for various stages in the production process. The three main
categories are finished goods, intermediate materials and crude materials,
although there are sub categories within each of these groups. One advantage of
the producer price index is that it detects inflationary tendencies early in
the production process.
prices that producers receive for products at all stages in the production
process, and not just final goods and services. The indices are calculated
separately for various stages in the production process. The three main
categories are finished goods, intermediate materials and crude materials,
although there are sub categories within each of these groups. One advantage of
the producer price index is that it detects inflationary tendencies early in
the production process.
The
GDP Deflator
GDP Deflator
One of the most important methods of determining
the rate of inflation is the GDP deflator. The GDP deflator is not based on a
sample survey as the CPL. It is directed at finding an index for all goods and
services purchased by consumers, businesses and government i.e., all goods and
services produced by the economy. The index is calculated by taking the GPA at
factor cost using current prices and dividing the figure by GDP at factor cost
using constant prices. Inflation is
indicated when nominal GDP is rising faster than real (constant) GDP. In a
nutshell, the GDP deflator is defined as
the rate of inflation is the GDP deflator. The GDP deflator is not based on a
sample survey as the CPL. It is directed at finding an index for all goods and
services purchased by consumers, businesses and government i.e., all goods and
services produced by the economy. The index is calculated by taking the GPA at
factor cost using current prices and dividing the figure by GDP at factor cost
using constant prices. Inflation is
indicated when nominal GDP is rising faster than real (constant) GDP. In a
nutshell, the GDP deflator is defined as
For example, if the rate of inflation is 16.3%,
then by the rule of 70, we can say that prices will double in about four years
and three months. The rule of 70 can be generally applied to other phenomenon
other than inflation
then by the rule of 70, we can say that prices will double in about four years
and three months. The rule of 70 can be generally applied to other phenomenon
other than inflation