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Maths... Class11

The document discusses the Consumer Price Index (CPI), including how it is constructed by selecting consumer classes, collecting price and consumption data, assigning weights, and calculating price indexes. An example is provided to construct a CPI comparing prices in 2012 and 2018 across food, clothing, fuel, electricity and miscellaneous goods.

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Darshit Jhawar
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75 views

Maths... Class11

The document discusses the Consumer Price Index (CPI), including how it is constructed by selecting consumer classes, collecting price and consumption data, assigning weights, and calculating price indexes. An example is provided to construct a CPI comparing prices in 2012 and 2018 across food, clothing, fuel, electricity and miscellaneous goods.

Uploaded by

Darshit Jhawar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Mathematics Project

Topic 20

PREVIOUS KNOWLEDGE

The Consumer Price Index or Cost of Living Index is the index number which measures changes in the
prices of consumer goods purchased by consumers in the current year as compared to the base year.
It measures the relative amount of money necessary to derive equal satisfaction during 2 time
periods, after taking into consideration the fluctuations in the retail prices due to inflation or
deflation. In India, Consumer Price Index numbers are constructed for the following class of people:

i) Agricultural Labourers
ii) Industrial workers
iii) Urban non-manual workers

Thus, the Cost of Living Index relates to a specific class of people and a specified geographical area.

AIMS & OBJECTIVES

The Consumer Price Index is one of the most frequently used statistical data for identifying periods
of inflation or deflation. We are performing and analyzing this topic because of its advantages. Those
are:

1. Cost of Living Index Numbers are widely used in the study of the relative positions of
business and economic conditions. At the government level, these are used for wage policy,
price policy and taxation.
2. Consumer price Index can be used to measure the purchasing power of different currencies.
Purchasing power of money is the reciprocal of CPI.
3. Consumer price Index is used as the basis for agreement with workers for determination of
money wages. It is also sed to calculate the allowances of employees so as to ensure the
same standard of living as in the base year.

CPI is used to measure the average changes in prices of goods and services purchased or
otherwise acquired by the households to satisfy their needs.

CONTENT

Construction of Consumer Price Index Number involves:

1. Selection of Consumer Class: In the first place, we need to decide about the class or group of
people for which index numbers is to be constructed that is, agricultural labourers, industrial
workers etc
2. Information about Family Consumption: Next step is to select some persons from the group
and find out their consumption of different items such as food, clothing, fuel, house rent etc.
3. Choice of base year: The base year is to be selected which should be a normal year and not
too far from the current year.
4. Information about Prices: Then, we need to collect retail prices of these selected
commodities for the current year and base year.
5. Weightage: We have to decide upon a weighting system about the selected goods in
accordance with their relative importance. These weights can be quantity weights or
expenditure weights.
As the relative importance of various items for different classes is not the same, prices are
always weighted and therefore, Cost of Living Index is a weighted index.

Consumer Price index (formula from the book)


Where,
I = p1/p0 x100 = price relative of an item consumed
W = p0q0 = base price of an item consumed
I01 = Weighted arithmetic mean of price relatives.
Separate index numbers are to be determined for each of the major groups by
calculating price relative of a selected item. The weights in this case are proportional to
the expenditure of an average family. Thus, the weighted average gives the final Cost Of
Living Index Number. This formula indicates the changes in expenditures incurred in
purchasing a given basket of goods in a current year as compared to the base year.
Purchasing power in year Y in terms of a particular year y’ then,
Purchasing Power= Index Number of y’/ Index number of y
Illustration: Construct a Consumer price Index for the year 2018 from the following data:

Commodity Group Unit Quantity Consumed Prices in 2012 Prices in 2018

Food kg 50 10 15

Clothing Metre 8 50 120

Fuel kW 2 60 90

Electricity units 48 2 5

Miscellaneous kg 30 6 12

Solution:

Commodity Quantity Consumed Price (2012) Price (2018) I = p1/p0 x100 Iw


Group

Food 50 10 15 150 7500

Clothing 8 50 120 240 1920

Fuel 2 60 90 150 300

Electricity 48 2 5 250 12000


Miscellaneous 30 6 12 200 6000

Sum: 138 27720

I01 = Σ Iw/ ΣW

= 27720/ 138

=200.86

This means that there is a net increase of 100.98 % in the cost of commodities in 2018 as
compared to the year 2012.

CONCLUSION

The prices of goods and services fluctuate over time, but when prices change too much
and too quickly, the effects can shock an economy. The Consumer Price Index (CPI),
the principal gauge of the prices of goods and services, indicates whether the economy
is experiencing inflation, deflation or stagflation. 

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