Macroeconomics-CPI

• Consumer price index-

• Is the measure of the changes in average price of goods
and services that consumers normally purchase such as
food ,clothing , medicals and others
• The CPI is measure that indicates changes in general
price level from base year to current year.
• There is an inverse relationship between general price
level and value of money.
• When the general price level is higher , the value of
money will be lower and vice versa.

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 CPI and WPI
• Consumer price index is a measure of inflation.
• CPI is index for cost of living/quality of living.
• CPI includes both rural and urban segment.
• CPI reflects on price that comes out of
consumers pocket
• WPI is related to wholesale….benchmark on
producers.
• WPI is used by government of india…

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 Macroeconomics-CPI
• Current year price index=(current year
price/Base year price)X100.%
commodity Base year price Current year Current year
price index
Food 150 240 (240/150)x100

clothing 300 420 (420/300)x100

Medical care 250 200 (200/250)x100

Transportation 160 180 (180/160)x100

SUM OF CURRENT YEAR INDEX=492.5, NO.OF ITEMS=4

SIMPLE CPI=492.5/4=123.1

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 Weighted consumer price index

• Concept-weightage is the figure used to measure the

importance of items in CPI basket depending on the
amount of money spent by the consumer on each item.
The highest weightage indicates the most important
commodity to the consumer whereas the lowest weightage
indicates the least important commodity.
If the weightage for food and transportation are 4 and 1
respectively it means that amount of money spent on food
is 4 times more than transportation.

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 Application of weighted CPI
COMMODITY BASE YEAR (2)CURRENT (3)CURRENT WEIGHTAGE( WPI
PRICE(1) YEAR PRICE YEAR INDEX 4) 3 X4
X 100
FOOD 150 240 (240/150)X 4 160 X4
100=160 =640
CLOTHING 300 420 (420/300)X 3 140 X
100=140 3=420
MEDICAL 250 200 (200/250)X 1 80 X1 =80
100=80
TRANSPO 160 180 (180/160)X 2 112.5X2=
RTATION 100=112.5 225

WEIGHTED CPI=SUM OF ALL WEIGTED PRICE INDEX /TOTAL WEIGHTS

=(640+420+80+225)/10=1365/10=136.5

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 Application of consumer price index

• To calculate the inflation rate

• Inflation=(CPI current year-CPI previous year)/x
100%
• From the previous example….
• Inflation rate=(136.50-100)/100=36.50%
• Analysis-The inflation rate is very high ,with an
increase of 36.5% in general price level .
• A higher inflation indicates a higher cost of living.

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 Causes of inflation
• Demand pull inflation is associated with booming
economy .
• There is too much money chasing too few goods.
• Demand pull inflation occurs when Aggregate demand
exceeds Aggregate supply.
• Rise in AD is caused by rise in consumer demand or increase in
government expenditure or rise in investment by firms or increase in
demand of a countrys exports by people in foreign countries or
combination of all above four.This means the AD curve will shift to
the right.

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 Causes of inflation
• Cost push inflation refers to an increase in
general price level associated with
increase in cost of production.
• Wage –pull inflation.
• Profit –push inflation
• Import –push inflation

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 Effects of inflation
• 1.Distribution of income
• People who gain from continous inflation are
• Businessmen who earn higher profits from rising prices
• Property owners such as real estate owners who gain when property prices
during inflation
• Share holders who receive higher dividends since companies profits are
higher.
• Debtors because the real value of money has changed.
• People who tend to lose from continuos inflation are
• Fixed income workers-salaried workers , pensioners
• Holders of fixed deposits ,LIC Policies
• Creditors as when they receive money owed to them, real value of money
will be less.
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 Effects of inflation
1.Distribution of income.
2.Savings
3.Production
4.Balance of trade.

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 Application of consumer price index

• To calculate changes in value of money.

• Changes in value of money=
• ((Base year index/CPI)-1 )X 100%
• Change in value of money for previous problem…
• Base year index=100,CPI=136.5..
• Change in value of money=((100/136.5)-1)x100=-26.7%
• Interpretation-we can say that value of money has dropped by
26.7%.For example….the value of Rs 100 in base year is worth only
Rs 73.30 in current year

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 Application of consumer price index

• To identify the distribution of income.

• The CPI can help to detect the distribution of
income among people .Based on the findings ,
the government can undertake necessary
measures that would help to reduce the gap
between rich and poor.
• To use as basis for future contracts.

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 Macroeconomics
1980 1980 1990 1990 1991 1991

P Q P Q P Q

popcorn 1.0 500 1.0 600 1.05 590

movies 5.0 300 10.0 200 10.50 210

Dietdrink 0.7 300 0.80 400 0.75 420

Table shows the prices and quantities produced of three goods in

1980,1990,1991.A Market bundle for a typical family is deemed to be
5 popcorns,3 movie shows and 3 diet drinks.Compute the
consumer price index for each of the three years using 1980 as
base year.

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 Macroeconomics
• The consumer price index for 1980 is 100.
• CPI 1980=(cost of buying the market bundle in 1980)/(cost of buying
the market bundle in 1980)
• =((5 x1.0)+(3x5.0)+(3x0.7))/((5x1.0)+(3x5.0)+(3x0.70))
• =100

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 Macroeconomics
• WPI concept consolidation
• Items included in WPI are different.
• Items include fertilizers ,minerals , industrial raw
materials and semi finished goods , machinery . WPI can
be interpreted as an index prices paid by producers for
their inputs.
• Wholesale prices rather than retail prices are used.
• Wholesale price indices for commodity are published
monthly by the office of Economic Adviser to the
government of India .They are reported in newspapers.

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