Question

1. What do the CPI and the PPI measure? Why do we need both of these price indexes? Select three countries as your target (one of them should be China), investigate the inflation rates of these countries, and explain why they are different or not? You may use diagram and chart in your answer.

Answer 1

CPI measures the changes in the price level of a basket of consumer goods and services that are sold in the market and purchased by the households, the consumers. CPI is the changes in prices from the point of view of the consumer. PPI is the opposite of CPI which measures the changes in the price level from the point of view of the sellers.

The CPI includes imports, the PPI does not include imports. Again, the CPI includes the various taxes which the PPI does not. This is because for the consumers changes in taxes have an effect on the price level. Thus to have a comprehensive knowledge, it is necessary to have both PPI and CPI, Having only the seller's or the consumer's pov is not optimum.

The inflation rates in China averaged 5.6% from 1986-2019. The inflation rates in US averaged at 3.26% from 1914-2019. inflation rates in India averaged 6.15% from 2012-2019. Thus it is seen that inflation rates vary significantly across developed and developing as well as between developing countries. The main reason for differences in inflation rate is the rate of growth of money. Those with higher inflation have higher growth rate of money supply.