Question

please give a detailed summary

What are the benefits of the CPI index in today’s economy and give an example of how it is used. What does the CPI measure? What is one problem with the CPI as a measure of the cost of living? What is the importance of the PPI to our economy? Provide and discuss one example of the importance of the PPI.

Answer 1

Consumer Price Index or CPI as it is commonly called is an index measuring retail inflation in the economy by collecting the change in prices of most common goods and services. Called market basket, CPI is calculated for a fixed list of items including food, housing, apparel, transportation, electronics, medical care, education, etc. Note that the price data is collected periodically, and thus, the CPI is used to calculate the inflation levels in an economy. This can be further used to compute the cost of living. This also provides insights as to how much a consumer can spend to be on par with the price change.

Why is CPI important

It directly affects what consumers pay to buy a select basket of goods and services. It is thus better indicator of the cost of living and, hence, reflecting the welfare objective of monetary policy

HOW CPI CALCULATE

• The Consumer Price Index or CPI is calculated by multiplying 100 to the fraction of the cost price of the current period and the base period.
• CPI Formula : (Cost of the basket in the current period/ Cost of the basket in base period) x 100

Producer Price Index

Producer Price Index (PPI) measures the average change in the price of goods and services which is received by the producers

The Producer Price Index or PPI is an index that measures the average price change of goods and services. It can be calculated either when the goods leave the place of production or as they enter the production process.

• In the case where the goods leave the production place, it is known as Output PPI.
• Similarly, Input PPI is when goods enter the production process.

The PPI measures price movements from the seller’s point of view. Conversely, the consumer price index (CPI), measures cost changes from the viewpoint of the consumer. In other words, this index tracks changes to the cost of production.

Why is the Producer Price Index important?

• COUNTRIES uses the WPI and CPI to calculate the inflation in the country.
• PPI is a leading indicator of CPI.
• When producers are faced with input inflation, those rising costs are passed along to the retailers and eventually to the consumer.
• This makes the Producer Price Index (PPI) an important indicator of the economy.