Consumer Price Index

19/07/2020 1 By indiafreenotes

Consumer Price Index is also known as the cost of living index.

It represents the average change in price over a period of time, paid by a consumer for a fixed basket of goods and services.

Uses of CPI:

  • It indicates the changes in the consumer prices.
  • It evaluates the purchasing power of money.
  • It is also used for comparison purposes.

Limitations of CPI;

  • CPI focuses on a fixed basket, as consumer behaviour cannot be predicted, we can’t be very sure about CPI value to be relevant.
  • Quality is not considered while calculating the CPI.
  • Inflation effects are not taken into consideration as the basket is fixed.

CPI can be computed using 2 methods:

  • Aggregate Expenditure method

CPI = (Total expenditure in current year/Total expenditure in base year)*100; which means;

CPI = Σp1q0/Σp0q0 * 100

  • Family Budget method

CPI =  ΣWP/ ΣW

Where P = p1/p0 * 100