1 5.2 consumer price index. 2 azizah isa. uitm kelantan definition: consumer price index (cpi) is ...

1

5.2

CONSUMER PRICE INDEX

2 AZIZAH ISA. UiTM KELANTAN

DEFINITION:Consumer Price Index (CPI) is

is a measure of general price level of goods and services in an economy as compared to the base year.

Base year = a selected year for reference, which is a nice and fine period without inflation or recession or disasters.

Sometimes known as cost-of-living index.


MANY INDEXES MEASURED:other than Consumer Price Index (CPI),

EXAMPLES: HOUSE INDEX IMPORT INDEX STOCK PRICE INDEX PALM OIL PRICE INDEX RUBBER PRICE INDEX INDUSTRIAL PRODUCTION INDEX PRODUCER PRICE INDEX


CONSUMER PRICE INDEX (CPI)

is measured by the current year average cost or price of a “consumer basket of goods” as a percentage of the cost or price of the same consumer basket of goods in a base year.


The importance of CPI as an economic indicator

to measure the general price level in the economy as compared to the base year.

to measure the changes in the value of money.

to determine the growth rate and development of a country.


3 steps in Constructing CPI

i. Select goods and services which will represent consumer’s expenses by consumers which includes only consumer goods and services in its consumption basket, in order to determine the effect of an increase in price on the consumers. CPI does not consider items purchased by business investments and government.

ii. Weighting the figures to measure the importance of each goods in terms of the money the consumer spends on each product on the list. Usually, important goods and services will have a greater influence over the price index.

iii. Select the base year or period of reference.


A simple price index, CPI formula

CPI =Current year consumption basket price

Base Year consumption basket price

=P1

P0X 100

X 100


Example 1: Calculating CPI (without weight given)

Goods Price in 2000

(RM)

Price in 2007

(RM)

Food (F) 5.00 8.00

Clothing (C) 30.00 50.00

Transportation (T)

Education (E)

16.00

150.00

20.00

200.00

Assuming 2000 as the base year:

a) Calculate the simple CPI for year 2007 for all the 4 goods.

b) Calculate the general price index or average CPI for year 2007.


Solution to Example 1:

CPI2005 =

=8.00 50.00 20.00

5.00X

100 + 30.00

X

100

16.00X

+ 100

= ( 160 +166.7 +125 +133.3 ) =

General / Average Price Index for year 2005

CPI = P1 X 100

P0

CPIF + CPIC + CPIT + CPIE

4

X

+200.00

150.00

100

146.3


Weighted CPI

WCPI = Weightage

Value

Current Year basket consumption cost / price

Base Year basket consumption cost / price X 100

P1

P0100X= W


Constructing the general /

average WCPI

General WCPI = Total Weighted Price Index of consumption basket

Total Weight

= ∑ WN PIN

W=

∑ WN

PI

P0

X 100

N

∑

=W1PI1 +W2PI2 +W3PI3 + …… + WNPIN

W1 + W2 + W3 + …………..+ WN

WCPIN = WN P1 X 100

P0 N(for each good)

W


Example 2 :Calculating WCPI (when weightage is stated)

Goods Price in base year (RM)

Price in 2007

(RM)

Weight

Food 5.00 8.00 4

Clothing 30.00 50.00 3

Transportation

Education

16.00

150.00

20.00

200.00

2

1

i. Compute the WPI for each item in the year 2007.

ii. Compute the general WPI for 2007.

iii. Compute the percentage change in the price level between the base year and 2007.

iv. Calculate the change in value of money between the base year and 2007.

v. Calculate the real value of money in the current year.


Solution to Example 2: (i & ii)

∑WCPI =

WN PIN

∑ W

=

48.00

5.00X X100 + 3 X

50.00

30.00X 100

+ 1X 200.00

150.00X 100

4+3+2+1

=640 + 500 + 250 + 133.3

10=

GWPI

2 X+20.00

16.00X100

General Weighted Price Index for year 2007

152.3


CPI is used to measure Inflation

Inflation Rate = % change in prices or CPI

= Current year PI – Base year PI

Base Year PI

= CPI1 – CPI0

CPI0

X 100

X 100

(% Change in General Price Level)


Inflation rate = % change in the general price leveliii. Compute the percentage change in the

price level between the base year and 2007.

= CPI1 – CPI0

CPI0

= 152.3 – 100

100

= 52.3 %

X 100

X 100


Changes in the Value of Money

% ∆ Value of Money

= 100 – General Price Index of base year (PI0) X 100

General Price Index of current year (PI1)

Real Value of Money = PI0

PI1

(as inflation rises, value of money falls.

X 100


iv) Calculate the change in the Value of Money between the base year and 2007.

Changes in the value of money

= 100 – PI0 x 100 PI1

= 100 – 100 x 100 152.3 = 100 – 65.7 = 34.3%

Because of inflation (or higher prices) the value of money falls by 34.3%.


v) Calculate the real value of money in the current year.

Real value of money

= PI0 x 100

PI1

= 100 x 100

152.3

= 65.7


Example 3: Given the following information of consumer

price indexes for an economy in the years between

2000-2003.

Calculate the percentage change in the general price level (inflation rate) for the followings:

a) between the year 2001 to 2002

b) between the year 2002 to 2003.

YEAR Consumer Price Index

2000 98

2001 100

2002 105

2003 103


Solution for Example 3:

Inflation rate:

a) between the year 2001 to 2002

105 – 100 X 100 = 105 – 100 = 5%

100

b) between the year 2002 to 2003.

103 – 105 X 100 = – 2 X 100 = – 1.9%

105 105 (deflation)


Exercise1: Let’s Try This!Goods Price in 2003

(RM)

Price in 2007

(RM)

Beverages (B) 4.50 6.50

Fish and meat (F) 35.00 55.00

Sugar and milk (S) 15.00 27.00


a) Calculate the simple CPI for year 2007 for all the 3 goods.

b) Calculate the general price index or average CPI

for year 2007.


Solution to Exercise 1:

CPI2006 =

=6.50 55.00 27.00

4.50X

100 + 35.00

X

100 15.00

X

+ 100

= (144.44 + 157.14 + 180) = 160.53

General / Average Price Index for year 2007

CPI = P1 X 100

P0

CPIB + CPIF + CPIS

3


Exercise 2 : LETS TRY THIS!

Goods Price in 2003

(RM)

Price in 2007

(RM)

Weightage

Beverages (B) 4.50 6.50 2

Fish and meat (F) 35.00 55.00 3

Sugar and milk (S) 15.00 27.00 1


a) Calculate WCPI for all the 3 goods in the year 2007.

b) Calculate general or average WCPI for year 2007.


Solution to Exercise 2:

∑WCPI =

WN PIN

∑ W

=

26.50

4.50X X 100 + 3 X

55.00

35.00X 100 + 1X

27.00

15.00X 100

2+3+1

=288.88 + 471.42 + 180

6= 156.72


Formula to calculate Real GNP or Real Income

Real GNP (Year 1)

=Price Index Year 0 or Base Year (PI0)

Price Index Year 1 or Current Year (PI1)X

Nominal GNP (Year 1)

rGNP = nGNP X PI 0

PI 1

rY = nY X PI 0

PI 1


Example 4: How to convert the nominal GNP to real GNP ?

Year Nominal GNP Price Index Real GNP

2000 RM345,788 million 100

2003 RM550,100 million 135 2007 RM875,570 million 159


Solution for Example 4: How to convert the nominal GNP to real GNP?

Year Nominal GNP Price Index Real GNP

2000 RM345,788 million 100

2003 RM550,100 million 135 2007 RM875,570 million 159

RM345,788 mil

RM407,481.5 mil

RM550,672 mil


Rate of growth (g):

g =Real GNP Year 1 – Real GNP Year 0

Real GNP Year 0X 100


Example 5:

Given year 1995 as base year. GNP for 1995 is RM5,100 million. Assuming Consumer Price Index for year 2002 is 112 and GNP for 2002 is RM6,110 million.

Based on the above information: a) Calculate Real GNP for the year 2002 b) Calculate the growth rate between the

year 1996 to 2002.


Solution to Example 5:

a) Real GNP for year 2002

= 6,110m X 100

112

= RM5, 455.36 million

b) g = (5455.36 – 5100) X 100 5100

= 6.96%


Problems arise in constructing CPI

Goods and services selected sometimes do not represent the real consumers expenditure

The base year selected may sometimes be inaccurate

Involved time-lag Price index is just a general picture on what

really happened to the general price level The weight given to each commodity might

not represent the exact consumer preference.


Question to Ponder (3): LET’S TRY THIS! Calculating WCPI

Goods Price in 1995

(RM)

Price in 1998

(RM)

Weight

Food and drinks 4.50 6.50 4

Clothes and shoes 35.00 55.00 3

Transportation

Rental

15.00

250.00

27.00

300.00

2

1

a) Taking 1995 as the base year. Calculate the weighted price index for 1998.

b) Calculate the percentage change in the general price level between 1995 and 1998.

c) Calculate the percentage change in the value of money between 1995 and 1998.


Solution to Question To Ponder (3):

∑WCPI =

WN PIN

∑ W

=

46.50

4.50X X100 + 3 X

55.00

35.00X 100

+ 1X 300.00

250.00X 100

4+3+2+1

=577 + 471 + 366 + 120

10=

GWPI

2 X+27.00

15.00X100

General Weighted Price Index for year 1998

153.4


c. % change in the value of money

= 100 – PI0 x 100

PI1

= 100 – 100 x 100

153.4

= 100 – 65.2

= 34.8%


THANK YOU.

For The Next Class; Try To Answer ALL “Questions

To Ponder” from Q4 to Q8 ANDModel Questions (page 117: Q10,

Q14 and Q15)

Have A Nice Day!


THANK YOU.

THAT’S ALL

FOR

TODAY


ECO 210 / MAR 2002The following table shows the price index of 4 types of goods for 2 different years

Goods Weight Price index for 1996 Price index for 1998

Rice 5 100 101.5

Sugar 3 100 102

Clothes 4 100 96

Transportation 2 100 110

a) Which year is the base year? Give your reason.

b) Comment on the changes in the price of clothes between 1996 and 1998.

c) Calculate the weighted price index for each of the goods in both years.

d) What had happened to the general price level between the two years.

e) What are the types of goods would you include in your calculation of price index?


ECO 211 / SEPT 2002

The table below shows the value of nominal GNP and price index for a country for 3 years.

Year 1999 2000 2001

Price Index 100 110 112

Nominal GNP

(RM Million)

35,000 43,000 48,000

a) Calculate the real GNP for year :

i) 1999

ii) 2000

iii) 2001.

b) Calculate the rate of economic growth between years:.

i) 1999 – 2000 ( based on real GNP)

ii) 2000 – 2001 ( based on nominal GNP).


ECO 108 / APR 2001

The following table shows the prices for 3 types of goods for the year 1990 and 1995

Goods

Price (RM)

Weight

1990 1995

X 1.00 1.50 3

Y 3.00 4.00 2

Z 2.00 4.00 5

a) Calculate the weighted price index for 1995

b) Calculate the inflation rate between 1990 and 1995.

c) Explain three problems that occur in the construction of the consumer price index.

Given the base year as 1990, answer the following questions:


ECO 108 / APR 2001

Use this information to answer the following questions

Year Population

(Million)

Nominal GNP

(RM Million)

Price Index

1998 7.5 69,800 112

1999 8.4 75,600 116

a) Calculate the real GNP for year 1998 and year 1999.

b) Calculate the nominal GNP per capita for 1999.

c) Calculate the percentage change in real GNP between 1998 to 1999


ECO 110 / APR 1999

The following table shows the national income data for a country

from 1990 to 1994.

With the information given, complete the table

Year Nominal GDP

(RM mil)

Price Index

Real GDP

(RM mil)

Economic rate of growth

(%)

1990 (a) 100 24,000 (b)

1991 (c) 110 (d) 0%

1992 30,240 (e) 25,200 (f)

1993 (g) 125 27,216 (h)

1994 (i) 150 (j) 10%


ECO 211 / MAY 2004

a) The following table contains the information about a consumption basket of a country. The year 2000 is assumed to be the base year

Item Weighted

Price index

Price in 2000 Price in 2001

Good L 625.0 2.00 2.50

Good M 412.5 1.60 2.20

Good N 184.0 2.50 2.50

i) Find the ‘weights’ assigned for each good

ii) What is purpose of assigning weights to the goods.

iii) Calculate the general weighted price index for 2001.

iv) If consumers’ incomes remained unchanged, what has happened to the standard of living in 2001.

b) Use the information in the following to answer the questions that follow

Year Nominal GNP

(RM Mil)

CPI Real GNP

(RM Mil)

2000 211,348 211,348

2001 467,100 148

2002 153 538,268

i) Calculate the missing values in the above table

ii) Find the economic growth rate between 2001 and 2002


Multiple Choice questions1. The rate of economic growth is best defined as

A. increase in investment as a % of GDP over time B. % increase in nominal GDP over time

C. % increase in real GDP overtime D. a % increase in the general price level over time

2. If the consumer price index (CPI) is rising more slowly than the national income, then

A. the real national income is increasing B. the real national income is decreasing

C. the real national income is not affected D. none of the above

3. The table below shows the CPI od a country for 4 consecutive years

Year CPI

1 100

2 110

3 120

4 124

The rate of inflation from Year 3 to Year 4 is

A. 3.33% B. 3.64%

C. 4% D. 24%


4. Real GDP and nominal GDP are different because real GDP

A. Includes the effect of employment changes in the economy B. Includes the effects of trade deficits

C. Has been adjusted for changes in the price level D. Excludes net exports and personal income tax

5. The value of output measured in constant dollars is known as

A. GNP at factor cost B. Nominal GNP

C. Real GNP D. GNP at market price

6. If CPI was 125 in year 1999 and 130 in year 2000, then the rate of inflation from 1999 to 2000 was

A. 3 % B. 4 %

C. 3.8 % D. 5 %

7. Real GDP in 1995 was RM8,200 million. In year 2000 real GDP had increased to RM10,500 million. The growth rate in real GDP between 1995 to 2000 was

A. 21.9 % B. 28.0 %

C. 18.0 % D. 20.0 %

1 5.2 consumer price index. 2 azizah isa. uitm kelantan definition: consumer price index (cpi) is ...

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