Economic Issues. Consumer Price Index.

1. 1
CONSUMER
PRICE
INDEX

2. 2
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.
 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.

3. 3
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

4. 4
CONSUMER PRICE 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.

5. 5
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.

6. 6
AZIZAH ISA. UiTM KELANTAN
3 steps in Constructing CPI
i. Select goods and services which will represent
consumer’s expenses by consumers which includes
only consumer 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.
ii. 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.
iii. Select the base year or period of reference.

7. 7
A simple price index, CPI
formula
CPI =
Current year consumption basket price
Base Year consumption basket price
=
P1
P0
X 100
X 100

8. 8
Example 1: Calculating CPI (without
weight given)
Goods Price in 2000
(RM)
Price in 2007
(RM)
Food (F) 5.00 8.00
Clothing (C) 30.00 50.00
Transportation (T)
Education (E)
16.00
150.00
20.00
200.00
Assuming 2000 as the base year:
a) Calculate the simple CPI for year 2007 for all the 4
goods.
b) Calculate the general price index or average CPI for
year 2007.

9. 9
Solution to Example 1:
CPI2005 =
=
8.00 50.00 20.00
5.00
X100 +
30.00
X100
16.00
X
+ 100
= ( 160 +166.7 +125 +133.3 ) =
General / Average Price Index for year 2005
CPI = P1 X 100
P0
CPIF + CPIC + CPIT + CPIE
4
X
+
200.00
150.00
100
146.3

10. Thanks
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