Inflation measuring

By Sujata Regoti 2013BIT039

Two Methods Of Measuring Inflation

1)By Percentage change in Price Index Number(PIN). A) Consumer Price Index(CPI)

B)Wholesale Price Index(WPI) 2)By Change in GDP deflator

Price Index

• Market Basket : number of goods that are representative of economy that are put together• The cost of this basket is compared over time• This results in Price Index

CPI

• A consumer price index (CPI) measures changes in the price level of a market basket of consumer goods and services purchased by households.

• The annual percentage change in a CPI is used as a measure of inflation.

Example :our hypothetical market basket is made up of movie related

goods and services.

Calculating Our “CPI”

• We first need to determine the base year. • Suppose we choose the base-year to be 2006 • The quantities purchased in 2007 and 2008 are irrelevant,

because we are assuming the household buys the same market basket of goods each month.

Calculate Expenditures on Base-Year Quantities (2006)

For the CPI we use “Current Prices” and “Constant Quantities”.P2006 x Q2006 =

(12 x $8.00) Movie Tickets(6 x $4.00) Popcorn(10 x $2.50) Soda= $145.00

Cost of the Market Basket in 2007,2008

2008:P2008 x Q2006 = (12 x $12.00) Movie

Tickets(6 x $5.50) Popcorn(10 x $3.50) Soda= $212.00

2007:P2007 x Q2006 = (12 x $10.00) Movie

Tickets(6 x $5.00) Popcorn(10 x $3.00) Soda= $180.00

To calculate the CPI we use the following formula:

100________

YearBasetheinesExpenditurYearCurrenttheinesExpenditurCPI

100__________

YearBaseinBasketofCostYearCurrentinBasketofCostCPI

Calculate the CPI for 2006

CPI2006 = (Cost of Basket2006/Cost of Basket2006) x 100

CPI2006 = (145/145) x 100 = 100

The value of the CPI is always equal to 100 in the base-year.

Calculate the CPI for 2007 and 2008

2008:CPI2008 = (Cost of

Basket2008/Cost of Basket2006) x 100

CPI2008 = (212/145) x 100 = 146.21

2007:CPI2007 = (Cost of

Basket2007/Cost of Basket2006) x 100

CPI2007 = (180/145) x 100 = 124.14

Calculating the Inflation Rate from the CPI

• To Calculate the inflation rate we use our growth rate formula.

100_

__%_

ValueOld

ValueOldValueNewChangePercent

Calculate the inflation rate from 2006 to 2007 and from 2007 to 2008Inflation06-07 = [(CPI2007 – CPI2006)/CPI2006] x 100Inflation06-07 = [(124.14 – 100)/100] x 100Inflation06-07 = 24.14%

Inflation07-08 = [(CPI2008 – CPI2007)/CPI2007] x 100Inflation07-08 = [(146.21 – 124.14)/124.14] x 100Inflation07-08 = 17.78%

Using Wholesale price index(WPI)

• the price of a representative basket of wholesale goods. • Now it is called producer price index(PPI)• India about 435 items were used for calculating the WPI

in base year 1993-94 while the advanced base year 2011-2012 uses 676 items.

• Calculation of inflation rate :100

___%_

ValueOldValueOldValueNewChangePercent

Using GNP deflator

• GNP Deflator is the ratio of Nominal GNP in a year to the real GNP Of that year

• GNP Deflator=Nominal GNP/Real GNP• Gross national product (GNP) is a broad measure of a

nation's total economic activity. GNP is the value of all finished goods and services produced in a country in one year by its

In 1999-2000Nominal GNP = Rs.1740.2 thousand crores Real GNP (1993-94) = Rs.1136.9 thousand crores GNP deflator(1999-2000)in % =1740.2/1136.9 X 100=153%

Nominal GNP in 2000-2001 = Rs.1819.04 thousand crores GNP deflator(2000-2001)in % =1819.04/1136.9 X 100=160%

% change in GNP deflator is rate of inflationThus, Rate of inflation = 160-153/153 X 100=4.6%

Thank you