Question

1. Explain briefly what the consumer price index is trying to measure and how it is constructed.

Answer 1

As we know that consumer consumes goods and servives to satisfy his unlimited wants. Consumer price index measures the overall costs of all the goods and services a consumer buys. The Consumer Price Index (CPI) is a measure of the average change overtime in the prices paid by urban consumers for a market basket of consumer goods and services.

The consumer price index tries to measure the overall cost of the goods and services bought by a typical consumer. It is constructed by surveying consumers to fix a basket of goods and services that the typical consumer buys, finding the prices of the goods and services over time, computing the cost of the basket at different times, and then choosing a base year. To compute the price index, we divide the cost of the market basket in the current year by the cost of the market basket in the base year and multiply by 100.

The index is calculated by taking the price of the basket in one year and dividing it by the price of the basket in another year. This ratio is then multiplied by 100. The base year is always 100.

CPI = Price of goods and servives in current year / Price of goods and services in base year X 100.

Hope you got the answer.

Thanks!