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A rise in the macro price level Measured by calculating the Inflation rate of a price index Inflation rates differ across countries Measured Quarterly/Monthly/Weekly

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Consumer Price Index Cost of Living Index Producer Price Index Commodity Price Index Core Price Index GDP Deflator

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Measure of the average price of consumer goods and services purchased by households Used by most of the developed countries to measure Inflation Calculated monthly and is one of the most closely watched national economic statistics

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2 basic types of data are needed to construct the CPI: - Price Data - Weighting Data Calculated using a Laspeyres Index Laspeyres Index uses the base year quantities

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PI t (L) = W i ( P it / P io ) where, W i = Q io P io / Q io P io PI t (L) = ( Q io P io / Q io P io ) ( P it / P io ) PI t (L) = Q io P it / Q io P io PI t (L) -> Laspeyres Price Index

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Period Rice Shirt House PriceQuantity PriceQuantity PriceQuantity 1998 10 10,000 120 400 780 50 2006 15 12,000 200 500 1000 75 15*10,000 + 200*400 + 1000*50 Consumer Price Index = ------------------------------ 10*10,000 + 120*400 + 780*50 = 1.497 % = 149.7

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Eg: CPI in 2005 -> 150 CPI in 2006 -> 160 160 – 150 Inflation Rate = ----------- * 100 ( 2005 – 06) 150 = 6.67 %

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As an economic Indicator As a deflator of other economic series As a means for Indexation To compare the Cost of Living in different cities To forecast future consumer expenditures To assess a nations progress towards economic stability

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Switching over from WPI to CPI is risky and unwieldy Too much of a lag in reporting CPI numbers

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CPI for Industrial Workers ( CPI-IW ) 145 for August 2008 ( Base : 2001 = 100 ) Source : Labour Bureau, Ministry of Labour, Government of India CPI for Urban Non Manual Employees ( CPI-UNME) 528 for March 2008 ( Base : 1984-85 = 100 ) Source : Central Statistical Organization, Government of India CPI for Agricultural/Rural Labourers ( CPI-AL ) 450 for August 2008 ( Base : 1986-87=100) Source : Labour Bureau, Ministry of Labour, Government of India

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CPI for All Urban Consumers ( CPI-U) 218.783 ( Base : 1982-84 = 100 ) CPI for Urban Wage Earners and Clerical Workers ( CPI – W ) 214.935 ( Base : 1982-84 = 100 ) Chained CPI for All Urban Consumers ( C-CPI-U ) 125.774 ( Base : 1999 =100 ) September 2008 Source : Bureau of Labor Statistics, US Dept. of Labour

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2.4 Index Numbers LEARNING GOAL Understand the concept of an index number; in particular, understand how the Consumer Price Index (CPI) is used to measure.

2.4 Index Numbers LEARNING GOAL Understand the concept of an index number; in particular, understand how the Consumer Price Index (CPI) is used to measure.

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