CONSUMER PRICE INDEX:

A consumer price index (CPI) is a measure estimating the average

price of consumer goods and services purchased by households. A
consumer price index measures a price change for a constant market
basket of goods and services from one period to the next within the same
area (city, region, or nation).It is a price index determined by measuring
the price of a standard group of goods meant to represent the typical
market basket of a typical urban consumer. Related, but different, terms
are the United Kingdom's CPI, RPI, and RPIX. It is one of several price
indices calculated by most national statistical agencies. The percent
change in the CPI is a measure estimating inflation. The CPI can be used
to index (i.e., adjust for the effect of inflation on the real value of
money: the medium of exchange) wages, salaries, pensions, and
regulated or contracted prices.
Two basic types of data are needed to construct the CPI: price data and
weighting data. The price data are collected for a sample of goods and
services from a sample of sales outlets in a sample of locations for a
sample of times. The weighting data are estimates of the shares of the
different types of expenditure as fractions of the total expenditure
covered by the index.
The index reference period, usually called the base year, often differs
both from the weight-reference period and the price reference period.
This is just a matter of rescaling the whole time-series to make the value
for the index reference-period equal to 100. Annually revised weights
are a desirable but expensive feature of an index, for the older the
weights the greater is the divergence between the current expenditure
pattern and that of the weight reference-period.
Example: The prices of 95,000 items from 22,000 stores, and 35,000
rental units are added together and averaged. They are weighted this
way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%,
Medical Care: 6.9%, Other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%.
Taxes (43%) are not included in CPI computation.

CPI= (Productrep X Pricecurrent)/(Productrep X Price11987*)

History:
Between 1971 and 1977, the United States CPI increased 47%.
In 2009 the Consumer Price Index fell for the first time since 1955.
USES OF CPI:
The CPI is often used to adjust consumer income payments for
changes in the dollar's value and to adjust other economic series.
Social Security ties the CPI to income eligibility levels; the federal
income tax structure relies on the CPI to make adjustments that
avoid inflation-induced increases in tax rates; finally, employers
use the CPI to make wage adjustments that keep up with the cost
of living. Data series on retail sales, hourly and weekly earnings,
and the national income and product accounts are all tied to the
CPI to translate the related indexes into inflation-free terms
The CPI and the Markets
Movements in the prices of goods and services most directly
affect fixed-income securities. If prices are rising, fixed bond
payments are worth less, effectively lowering the bonds' yields.
Inflation also poses a serious problem to holders of fixed annuities
and pension plans as it erodes the effective value of the fixed
payments. Many retirees have watched their pension payment
amounts lose buying power over time.
CONCLUSION:
The CPI is probably the most important and widely-watched
economic indicator, and it's the best known measure for
determining cost of living changes--which, as history shows us,
can be detrimental if they are large and rapid. The CPI is used to
adjust wages, retirement benefits, tax brackets, and other
important economic indicators. It can tell investors some things
about what may happen in the financial markets, which share
both direct and indirect relationships with consumer prices. By
knowing the state of consumer prices, investors can make
appropriate investment decisions and protect themselves by using
investment products such as TIP.
GDP DEFLATOR:

In economics, the GDP deflator (implicit price deflator for GDP) is a

measure of the level of prices of all new, domestically produced, final
goods and services in an economy. GDP stands for gross domestic
product, the total value of all final goods and services produced within
that economy during a specified period.

CALCULATION OF GDP DEFLATOR:

Step 1: Choose a country or region to study

Choose a country or a region that you wish to study and learn more
about its gross domestic product.

Step 2: Find the nominal GDP

Find the nominal GDP for your chosen region. The nominal GDP is the
country’s gross domestic product measured at today’s market prices.

You can get the nominal GDP for most nations from the World Bank
web site – worldbank.org.

Step 3: Select a base year you wish to compare

Select a base year that you will use for comparison to the current gross
domestic product.
Step 4: Get the real GDP for your base year

Get the real GDP measurement for your country. The real GDP is the
gross domestic product of your country, measured in dollars from your
base year.

If you have chosen a base year of 1995, for example, the real GDP will
be the current gross domestic product of your region, multiplied by their
1995 prices.

Step 5: Divide nominal GDP by real GDP, multiply by 100

Divide the nominal GDP by the real GDP. Multiply this total by 100 to
find the GDP deflator.

Rearrange the values in the equation to find nominal GDP when you
know the real GDP and the GDP deflator.

Step 6: Interpret the GDP deflator

Interpret the GDP deflator. Think of it as the ratio of today’s prices to

those of your base year.

Interpretation:

The GDP deflator can be depicted mathematically by this

equation given below:

GDP deflator = ( Nominal GDP / Real GDP)*100.

USES OF GDP DEFLATOR:

 The GDP deflator can be seen as a conversion factor

that transfigure the Real GDP into Nominal GDP.
 GDP deflator gives the construction of an implicit
index of price level for one year.
 It is used to calculate the rate of inflation or
deflation.