Consumer Price Index - Calculation of the CPI - Homework Help

What do you understand by the term CPI?

¨      It measures the amount of commodities and services a given sum of money can buy.

¨      Also known as purchasing power or internal value of money.

¨      General Price changes will affect the value of money.

Definition: CPI is a figure that measures the relative changes in the general price level from a base year to a current year.

Steps Involved in the Calculation of the CPI

i.        Selection of a base year

ii.      Selection of a basket of commodities and services.

iii.    Gather information on prices for base year and current year.

iv.    Assign weights to each good and service according to their relative importance.

v.      Calculate relative price changes between base year and current year and multiply this by the weights.

vi.    Total the amount (i.e. relative prices x weights) and divide it by the total weights.

Illustration

 Items (per kg) Prices Relative prices Weight Relative prices X weight Yr 1 Yr 2 Yr 1 Yr 2 Yr 1 Yr 2 A B C 1.00 3.00 5.00 1.80 4.50 6.30 100 100 100 180 150 126 6 3 1 600 300 100 1080 450 126 10 1000 1656

Weighted price index for Yr 1 =    100

Weighted price index for Yr 2 =    165.6

Importance of CPI

Price indices are of importance to the government, firms and traders and to the trade union.

i.        The Government use these indices as denominator to measure other economic indictors such as :-

• Real GNP
• Cost of living and hence standards of living
• Ensure exchange rate stability

ii.      Firms and traders use these indices to adjust their profit margin especially when cost of production changes.

iii.    Trade Union uses these indices in their wage negotiation with the employers.

Problems Involve in the Construction of CPI

¨      Difficulty in choosing a base year

¨      Difficulty in assigning weights to each commodity according to their relative importance since these weights change from time to time

¨      As taste and preference change from time to time, it is misleading to assume that the same amount will be spent

¨      Difficulty involve in the collection of accurate information on household expenditure pattern as people resent to such enquiries

¨      Difficult to include all range, grades or quality of goods in the market

Email based consumer price index assignment help - consumer price index homework help at TutorsGlobe

Are you searching economics tutor for help with Consumer Price Index questions?  Consumer Price Index topic is not easier to learn without external help?  We at www.tutorsglobe.com offer finest service of economics homework help and economics homework help. Live tutors are available for 24x7 hours helping students in their Consumer Price Index related problems. We provide step by step Consumer Price Index question's answers with 100% plagiarism free content. We prepare quality content and notes for Consumer Price Index topic under economics theory and study material. These are avail for subscribed users and they can get advantages anytime.

Why TutorsGlobe for Consumer Price Index homework help

• Higher degree holder and experienced tutors network
• Punctuality and responsibility of work
• Quality solution with 100% plagiarism free answers
• Time on Delivery
• Privacy of information and details
• Excellence in solving accounting questions in excels and word format.
• Best tutoring assistance 24x7 hours