Measures of Inflation - 15 Mints Seminar Notes

Measures of Inflation - 15 Mints Seminar Notes

 

DEFINITION: 

A specific period where the prices of the goods and services rise and declines the purchasing power of the given currency overtime.

MEASURES OF INFLATION USED IN INDIA:

1. CONSMER PRICE INDEX
2. WHOLESALE PRICE INDEX

1. CONSMER PRICE INDEX:

• It is an index number of the cost met by a specified class of consumers in buying a basket of goods and services.
  
• Basket of goods and services refers to the goods needed in daily day to day consumption
• Pattern of consumption differs according to group of people and their consumption basis.
• Group of people refers to those who have identical patter of consumption.

USES:

• Indicates changes in the consumer price.
• Helps government in formulating policies regarding control of price, taxation, imports and exports of commodities.
• Used in granting allowances and other facilities to employees.
• Used in comparing changes in cost of living in different group of people.

            

TWO METHODS TO CALCLATE CPI:

AGGREGATIVE METHOOD:

P01  =  Total expenditure in the current year / Total expenditure in the base year * 100

FAMILY BUDGET METHOD
                P01 =  ∑W1 /∑W2
                  W = p0q0
P0  = base year price
        Q0 = units consumed in base year

2. WHOLESALE PRICE INDEX

• Represents basket of wholesale goods. India and Philippines use WPI method.
  
• The wholesale price index focuses on the prices of goods traded between corporations rather than goods bought by consumers.
  
• WPI is to monitor price movements the reflects supply and demand in industry manufacturing and construction.
  

METHODS TO CALCULATE  

• LASPEYRES FORMULA 
• TEN DAY PRICE INDEX

LASPEYRES INDEX = ∑ observation price * base quantity/ ∑ base price * base quantity

Laspeyres formula is weighted arithmetic mean based on the fixed value based weights for the base period

USES

• Used by RBI and government of India to frame monetary and fiscal policies.
• Forecasting changes in business conditions indicating supply and demand relationships.

Presented by

Bhavyatha

Banking Student

Magme School of Banking