5.2
CONSUMER
PRICE INDEX
1
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.
AZIZAH ISA. UiTM KELANTAN
2
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
AZIZAH ISA. UiTM KELANTAN
3
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.
AZIZAH ISA. UiTM KELANTAN
4
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.
AZIZAH ISA. UiTM KELANTAN
5
3 steps in Constructing CPI
i.
ii.
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.
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.
AZIZAH
ISA. UiTM KELANTAN
6
iii.
Select
the base year or period of reference.
A simple price index, CPI
formula
CPI =
Current year consumption basket price
Base Year consumption basket price
=
P1
P0
AZIZAH ISA. UiTM KELANTAN
X 100
X 100
7
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.
AZIZAH ISA. UiTM KELANTAN
8
Solution to Example 1:
CPI = P1 X 100
P0
CPI2005 =
CPIF
+
8.00
=
5.00
CPIC
50.00
X 100
+
X 100
+
+
30.00
= ( 160 +166.7 +125 +133.3 )
CPIT
20.00
X
+
100
16.00
+
CPIE
200.00
X 100
150.00
= 146.3
4
General / Average Price Index for year 2005
AZIZAH ISA. UiTM KELANTAN
9
Weighted CPI
WCPI =Weightage
Value
Current Year basket consumption cost / price
Base Year basket consumption cost / price
X 100
P1
=
W
AZIZAH ISA. UiTM KELANTAN
X
100
P0
10
Constructing the general /
average WCPI
WCPIN =
WN
(for each good)
P1
P0
X 100
N
General WCPI = Total Weighted Price Index of consumption basket
Total Weight
PI
=
∑
WN PIN
=
∑
WN
W
=
P0
X
100
N
∑W
W1PI1 +W2PI2 +W3PI3 + …… + WNPIN
W1 + W2 + W3 + …………..+ WN
AZIZAH ISA. UiTM KELANTAN
11
Example 2 :Calculating WCPI
(when weightage is stated)
Goods
Price in base
year (RM)
Price in 2007
(RM)
Weight
Food
5.00
8.00
4
Clothing
30.00
50.00
3
Transportation
Education
16.00
150.00
20.00
200.00
2
1
i. Compute the WPI for each item in the year 2007.
ii. Compute the general WPI for 2007.
iii. Compute the percentage change in the price level between the
base year and 2007.
iv. Calculate the change in value of money between the base year
and 2007.
v. Calculate the real value of money in the current year.
AZIZAH ISA. UiTM KELANTAN
12
Solution to Example 2: (i & ii)
∑ WN PIN
WCPI =
8.00
4 X
GWPI=
X100
5.00
∑W
20.00
200.00
+
100
+ 3 X
2 X
X
+ 1X
X100
X 100
150.00
16.00
30.00
50.00
4+3+2+1
640 + 500 + 250 + 133.3
=
10
= 152.3
General Weighted Price Index for year 2007
AZIZAH ISA. UiTM KELANTAN
13
CPI is used to measure Inflation
Inflation Rate = % change in prices or CPI
= Current year PI – Base year PI
100
X
Base Year PI
= CPI1 – CPI0
X 100
CPI0
(% Change in General Price Level)
AZIZAH ISA. UiTM KELANTAN
14
Inflation rate
= % change in the general price level
iii. Compute the percentage change in the
price level between the base year and
2007.
= CPI1 – CPI0
X 100
CPI0
= 152.3 – 100 X 100
100
= 52.3 %
AZIZAH ISA. UiTM KELANTAN
15
Changes in the Value of Money
% ∆ Value of Money
= 100 – General Price Index of base year (PI0) X 100
General Price Index of current year (PI1)
Real Value of Money = PI0
X 100
PI1
(as inflation rises, value of money falls.
AZIZAH ISA. UiTM KELANTAN
16
iv) Calculate the change in the Value of
Money between the base year and 2007.
Changes in the value of money
= 100 –
PI0 x 100
PI1
= 100 –
100 x 100
152.3
= 100 – 65.7
= 34.3%
AZIZAH ISA. UiTM KELANTAN
Because of inflation (or higher
prices) the value of money
falls by 34.3%.
17
v) Calculate the real value of money in
the current year.
Real value of money
= PI0 x 100
PI1
= 100 x 100
152.3
= 65.7
AZIZAH ISA. UiTM KELANTAN
18
Example 3:
Given the following information of consumer
price indexes for an economy in the years between
2000-2003.
YEAR
Consumer Price Index
2000
98
2001
100
2002
105
2003
103
Calculate the percentage change in the general price level
(inflation rate) for the followings:
a)
between the year 2001 to 2002
b)
between the year 2002 to 2003.
AZIZAH ISA. UiTM KELANTAN
19
Solution for Example 3:
Inflation rate:
a)
between the year 2001 to 2002
105 – 100 X 100 = 105 – 100 = 5%
100
b)
between the year 2002 to 2003.
103 – 105 X 100 = – 2 X 100 = – 1.9%
105
105 (deflation)
AZIZAH ISA. UiTM KELANTAN
20
Exercise1: Let’s Try This!
Goods
Price in 2003
(RM)
Price in 2007
(RM)
Beverages (B)
4.50
6.50
Fish and meat (F)
35.00
55.00
Sugar and milk (S)
15.00
27.00
Assuming 2003 as the base year:
a) Calculate the simple CPI for year 2007 for all the 3
goods.
b) Calculate the general price index or average CPI
for year 2007.
AZIZAH ISA. UiTM KELANTAN
21
Solution to Exercise 1:
CPI = P1 X 100
P0
CPI2006 =
CPIB
+
6.50
=
=
4.50
CPIF
+
55.00
X 100
27.00
X 100
+
35.00
CPIS
X 100
+
15.00
(144.44 + 157.14 + 180) = 160.53
3
General / Average Price Index for year 2007
AZIZAH ISA. UiTM KELANTAN
22
Exercise 2 : LETS TRY THIS!
Goods
Price in 2003
(RM)
Price in 2007
(RM)
Weightage
Beverages (B)
4.50
6.50
2
Fish and meat (F)
35.00
55.00
3
Sugar and milk (S)
15.00
27.00
1
Assuming 2003 as the base year:
a) Calculate WCPI for all the 3 goods in the year 2007.
b) Calculate general or average WCPI for year 2007.
AZIZAH ISA. UiTM KELANTAN
23
Solution to Exercise 2:
WCPI
=
∑ WN PIN
∑W
2 X
6.50
X 100 + 3 X
4.50
27.00
55.00
X 100 + 1 X 15.00 X 100
35.00
=
2+3+1
288.88 + 471.42 + 180
=
AZIZAH ISA. UiTM KELANTAN
6
=
156.72
24
Formula to calculate
Real GNP or Real Income
Real GNP = Nominal GNP
(Year 1)
(Year 1)
Price Index Year 0 or Base Year (PI0)
X
Price Index Year 1 or Current Year (PI1)
rGNP = nGNP X
PI 0
PI 1
rY = nY X
AZIZAH ISA. UiTM KELANTAN
PI 0
PI 1
25
Example 4:
How to convert the nominal GNP
to real GNP ?
Year
Nominal GNP
Price Index
2000
RM345,788 million
100
2003
RM550,100 million
135
2007
RM875,570 million
159
AZIZAH ISA. UiTM KELANTAN
Real GNP
26
Solution for Example 4:
How to convert the nominal GNP
to real GNP?
Year
Nominal GNP
Price Index
Real GNP
2000
RM345,788 million
100
RM345,788 mil
2003
RM550,100 million
135
RM407,481.5 mil
2007
RM875,570 million
159
RM550,672 mil
AZIZAH ISA. UiTM KELANTAN
27
Rate of growth (g):
g
Real GNP Year 1 – Real GNP Year 0
X 100
=
AZIZAH ISA. UiTM KELANTAN
Real GNP Year 0
28
Example 5:
 Given year 1995 as base year. GNP for 1995 is
RM5,100 million. Assuming Consumer Price
Index for year 2002 is 112 and GNP for 2002 is
RM6,110 million.
Based on the above information:
 a) Calculate Real GNP for the year 2002
 b) Calculate the growth rate between the
year 1996 to 2002.
AZIZAH ISA. UiTM KELANTAN
29
Solution to Example 5:
a)
Real GNP for year 2002
= 6,110m X 100
112
= RM5, 455.36 million
b)
g = (5455.36 – 5100) X 100
5100
= 6.96%
AZIZAH ISA. UiTM KELANTAN
30
Problems arise
in constructing CPI
 Goods and services selected sometimes do
not represent the real consumers expenditure
 The base year selected may sometimes be
inaccurate
 Involved time-lag
 Price index is just a general picture on what
really happened to the general price level
 The weight given to each commodity might
not represent the exact consumer preference.
AZIZAH ISA. UiTM KELANTAN
31
Question to Ponder (3): LET’S TRY THIS!
Calculating WCPI
Goods
Price in 1995
(RM)
Price in 1998
(RM)
Weight
Food and drinks
4.50
6.50
4
Clothes and shoes
35.00
55.00
3
Transportation
Rental
15.00
250.00
27.00
300.00
2
1
a) Taking 1995 as the base year. Calculate the weighted
price index for 1998.
b) Calculate the percentage change in the general price
level between 1995 and 1998.
c) Calculate the percentage change in the value of
money between 1995 and 1998.
AZIZAH ISA. UiTM KELANTAN
32
Solution to Question To Ponder (3):
∑ WN PIN
WCPI =
6.50
4 X
GWPI=
X100
4.50
∑W
27.00
300.00
+
100
+ 3 X
2 X
X
+ 1X
X100
X 100
15.00
250.00
35.00
55.00
4+3+2+1
577 + 471 + 366 + 120
=
10
=
153.4
General Weighted Price Index for year 1998
AZIZAH ISA. UiTM KELANTAN
33
c. % change in the value of
money
= 100 –
PI0 x 100
PI1
= 100 –
100 x 100
153.4
= 100 – 65.2
= 34.8%
AZIZAH ISA. UiTM KELANTAN
34
THANK YOU.
Have A Nice Day!
For The Next Class;
Try To Answer ALL “Questions
To Ponder”
from Q4 to Q8
AND
Model Questions (page 117: Q10,
Q14 and Q15)
AZIZAH ISA. UiTM KELANTAN
35
THANK YOU.
THAT’S ALL
FOR
TODAY
AZIZAH ISA. UiTM KELANTAN
36
ECO 210 / MAR 2002
The following table shows the price index of 4 types of goods for
2 different years
Goods
Weight
Price index for 1996 Price index for 1998
Rice
5
100
101.5
Sugar
3
100
102
Clothes
4
100
96
Transportation
2
100
110
a) Which year is the base year? Give your reason.
b) Comment on the changes in the price of clothes between 1996 and
1998.
c) Calculate the weighted price index for each of the goods in both years.
d) What had happened to the general price level between the two years.
e) What are the types of goods would you include in your calculation of
price index?
AZIZAH ISA. UiTM KELANTAN
37
ECO 211 / SEPT 2002
The table below shows the value of nominal GNP and price
index for a country for 3 years.
Year
Price Index
Nominal GNP
(RM Million)
1999
2000
2001
100
110
112
35,000
43,000
48,000
a) Calculate the real GNP for year :
i)
1999
ii) 2000
iii) 2001.
b) Calculate the rate of economic growth between years:.
i)
1999 – 2000 ( based on real GNP)
ii) 2000 – 2001 ( based on nominal GNP).
AZIZAH ISA. UiTM KELANTAN
38
ECO 108 / APR 2001
The following table shows the prices for 3 types of goods
for the year 1990 and 1995
Goods
Weight
Price (RM)
1990
1995
X
1.00
1.50
3
Y
3.00
4.00
2
Z
2.00
4.00
5
Given the base year as 1990, answer the following questions:
a) Calculate the weighted price index for 1995
b) Calculate the inflation rate between 1990 and 1995.
c) Explain three problems that occur in the construction of the
consumer price index.
AZIZAH ISA. UiTM KELANTAN
39
ECO 108 / APR 2001
Use this information to answer the following questions
Year
Population
(Million)
Nominal GNP
(RM Million)
Price Index
1998
7.5
69,800
112
1999
8.4
75,600
116
a) Calculate the real GNP for year 1998 and year 1999.
b) Calculate the nominal GNP per capita for 1999.
c) Calculate the percentage change in real GNP between 1998 to 1999
AZIZAH ISA. UiTM KELANTAN
40
ECO 110 / APR 1999
The following table shows the national income data for a country
from 1990 to 1994.
With the information given, complete the table
Year
Nominal
GDP
(RM mil)
Price
Index
Real GDP
(RM mil)
Economic
rate of
growth
(%)
1990
(a)
100
24,000
(b)
1991
(c)
110
(d)
0%
1992
30,240
(e)
25,200
(f)
1993
(g)
125
27,216
(h)
1994
(i)
150
(j)
10%
AZIZAH ISA. UiTM KELANTAN
41
ECO 211 / MAY 2004
a)
The following table contains the information about a consumption basket of a country.
The year 2000 is assumed to be the base year
Item
Weighted
Price index
Price in 2000
Price in 2001
Good L
625.0
2.00
2.50
Good M
412.5
1.60
2.20
Good N
184.0
2.50
2.50
i)
Find the ‘weights’ assigned for each good
ii)
What is purpose of assigning weights to the goods.
iii) Calculate the general weighted price index for 2001.
iv) If consumers’ incomes remained unchanged, what has happened to the standard of living in 2001.
b)
Use the information in the following to answer the questions that follow
Year
Nominal GNP
(RM Mil)
2000
211,348
2001
467,100
2002
i)
CPI
Real GNP
(RM Mil)
211,348
148
153
538,268
Calculate the missing values in the above table
ii)AZIZAH
FindISA.
theUiTM
economic
growth rate between 2001 and 2002
KELANTAN
42
Multiple Choice questions
1.
2.
3.
The rate of economic growth is best defined as
A.
increase in investment as a % of GDP over time
C.
% increase in real GDP overtime
B.
% increase in nominal GDP over time
D.
a % increase in the general price level over time
If the consumer price index (CPI) is rising more slowly than the national income, then
A.
the real national income is increasing
B.
the real national income is decreasing
C.
the real national income is not affected
D.
none of the above
The table below shows the CPI od a country for 4 consecutive years
Year
CPI
1
100
2
110
3
120
4
124
The rate of inflation from Year 3 to Year 4 is
A.
3.33%
B.
3.64%
C.
4%
D.
24%
AZIZAH ISA. UiTM KELANTAN
43
4.
Real GDP and nominal GDP are different because real GDP
A.
Includes the effect of employment changes in the economy
B. Includes the effects of trade deficits
C.
Has been adjusted for changes in the price level
D.
5.
The value of output measured in constant dollars is known as
A.
GNP at factor cost
B.
Nominal GNP
C.
Real GNP
D.
GNP at market price
6.
If CPI was 125 in year 1999 and 130 in year 2000, then the rate of inflation from 1999 to 2000 was
A.
3%
B.
4%
C.
3.8 %
D.
5%
7.
Real GDP in 1995 was RM8,200 million. In year 2000 real GDP had increased to RM10,500 million. The growth rate in
real GDP between 1995 to 2000 was
A.
21.9 %
B.
28.0 %
C.
18.0 %
D.
20.0 %
AZIZAH ISA. UiTM KELANTAN
Excludes net exports and personal income tax
44