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5.2. CONSUMER PRICE INDEX. 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 .

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slide1

5.2

CONSUMER PRICE INDEX

definition consumer price index cpi is
DEFINITION:Consumer Price Index (CPI) is
  • is a measure of general price level of goods and services in an economyas 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
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
CONSUMERPRICE 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
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
3 steps in Constructing CPI
  • Select goods and services which will represent consumer’s expenses by consumers which includes onlyconsumer 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.
  • 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.
  • Select the base year or period of reference.
a simple price index cpi formula
A simple price index, CPI formula

CPI =

Current year consumption basket price

X

100

Base Year consumption basket price

P1

100

=

X

P0

example 1 calculating cpi without weight given
Example 1: Calculating CPI (without weight given)
  • Assuming 2000 as the base year:
  • Calculate the simple CPI for year 2007 for all the 4 goods.
  • Calculate the general price index or average CPI for year 2007.
solution to example 1
Solution to Example 1:

CPI = P1 X 100

P0

CPI2005

=

CPIF +

CPIC +

CPIT +CPIE

8.00 50.00 20.00

200.00

X

X

100

+

X

100

100

=

+

+

X

100

5.00

30.00

16.00

150.00

=

( 160 +166.7 +125 +133.3 ) =

146.3

4

General / Average Price Index for year 2005

weighted cpi
Weighted CPI

WCPI =

Current Year basket consumption cost / price

Weightage

Value

X100

Base Year basket consumption cost / price

P1

100

X

W

=

P0

constructing the general average wcpi
Constructing the general / average WCPI

WCPIN = WN P1 X 100

P0 N

(for each good)

General WCPI=

Total Weighted Price Index of consumption basket

Total Weight

PI

X

100

WN PIN

WN

P0

N

=

=

W

W

W1PI1 +W2PI2 +W3PI3 + …… + WNPIN

=

W1 + W2 + W3 + …………..+ WN

example 2 calculating wcpi when weightage is stated
Example 2 :Calculating WCPI (when weightage is stated)
  • Compute the WPI for each item in the year 2007.
  • Compute the general WPI for 2007.
  • Compute the percentage change in the price level between the base year and 2007.
  • Calculate the change in value of money between the base year and 2007.
  • Calculate the real value of money in the current year.
solution to example 2 i ii
Solution to Example 2: (i & ii)

WNPIN

WCPI

=

∑W

20.00

200.00

8.00

50.00

+

100

X

100

+

3

X

2

X

X

+

1

X

X

100

4

X

X

100

150.00

16.00

5.00

30.00

GWPI

=

4+3+2+1

640 + 500 + 250 + 133.3

152.3

=

=

10

General Weighted Price Index for year 2007

cpi is used to measure inflation
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

100

X

X 100

(% Change in General Price Level)

inflation rate
Inflation rate

= % change in the general price level

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

= CPI1 – CPI0

CPI0

=152.3 – 100

100

= 52.3 %

100

X

X

100

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

Real value of money

= PI0 x 100

PI1

= 100 x 100

152.3

  = 65.7

example 3
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.

solution for example 3
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
Exercise1: Let’s Try This!
  • Assuming 2003 as the base year:
  • Calculate the simple CPI for year 2007 for all the 3 goods.
  • Calculate the general price index or average CPI
  • for year 2007.
solution to exercise 1
Solution to Exercise 1:

CPI = P1 X 100

P0

CPI2006

=

CPIB +

CPIF +

CPIS

6.50 55.00 27.00

=

+

X

100

+

X

100

X

100

4.50

35.00

15.00

=

(144.44 + 157.14 + 180) = 160.53

3

General / Average Price Index for year 2007

exercise 2 lets try this
Exercise 2 : LETS TRY THIS!
  • Assuming 2003 as the base year:
  • Calculate WCPI for all the 3 goods in the year 2007.
  • Calculate general or average WCPI for year 2007.
solution to exercise 2
Solution to Exercise 2:

WN PIN

WCPI

=

∑ W

27.00

55.00

6.50

+

+

1

X

X

100

2

X

X

100

3

X

X

100

15.00

35.00

4.50

=

2+3+1

288.88 + 471.42 + 180

=

=

156.72

6

formula to calculate real gnp or real income
Formula to calculate Real GNP or Real Income

Price Index Year 0 or Base Year (PI0)

Real GNP (Year 1)

Nominal GNP (Year 1)

=

X

Price Index Year 1 or Current Year (PI1)

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

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

YearNominal GNPPrice IndexReal 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
Rate of growth (g):

Real GNP Year 1 – Real GNP Year 0

g

X

100

=

Real GNP Year 0

example 5
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
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
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
Question to Ponder (3): LET’S TRY THIS!Calculating WCPI
  • Taking 1995 as the base year. Calculate the weighted price index for 1998.
  • Calculate the percentage change in the general price level between 1995 and 1998.
  • Calculate the percentage change in the value of money between 1995and 1998.
solution to question to ponder 3
Solution to Question To Ponder (3):

WNPIN

WCPI

=

∑W

27.00

300.00

6.50

55.00

+

100

X

100

+

3

X

2

X

X

+

1

X

X

100

4

X

X

100

15.00

250.00

4.50

35.00

GWPI

=

4+3+2+1

577 + 471 + 366 + 120

153.4

=

=

10

General Weighted Price Index for year 1998

c change in the value of money
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
THANK YOU.

Have A Nice Day!

For The Next Class;

Try To Answer ALL “Questions To Ponder” from Q4 to Q8 AND

Model Questions (page 117: Q10, Q14 and Q15)

thank you1
THANK YOU.

THAT’S ALL

FOR

TODAY

slide37

ECO 210 / MAR 2002

The following table shows the price index of 4 types of goods for 2 different years

  • Which year is the base year? Give your reason.
  • Comment on the changes in the price of clothes between 1996 and 1998.
  • Calculate the weighted price index for each of the goods in both years.
  • What had happened to the general price level between the two years.
  • What are the types of goods would you include in your calculation of price index?
slide38

ECO 211 / SEPT 2002

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

  • 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).
slide39

ECO 108 / APR 2001

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

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

  • Calculate the weighted price index for 1995
  • Calculate the inflation rate between 1990 and 1995.
  • Explain three problems that occur in the construction of the consumer price index.
slide40

ECO 108 / APR 2001

Use this information to answer the following questions

  • Calculate the real GNP for year 1998 and year 1999.
  • Calculate the nominal GNP per capita for 1999.
  • Calculate the percentage change in real GNP between 1998 to 1999
slide41

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

slide42

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

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

  • Calculate the missing values in the above table
  • Find the economic growth rate between 2001 and 2002
slide43

Multiple Choice questions

  • 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
  • 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
  • The table below shows the CPI od a country for 4 consecutive years
  • YearCPI
  • 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%
slide44

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
  • 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 %
  • 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 %