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Consumer Price index (CPI), , , , , Consumer price index measures the average change in retail prices., It reflects the average increase in the cost of the commodities consumed by a class of people so that they, can maintain the same standard of living in current year., It is also known as Cost of living index numbers, retail price index number or price of living index number., , Why do we need CPI, , , , , We need CPI because general index numbers do not highlight the effect of rise or fall in prices of various, commodities consumed by different classes of people on their cost of living., Different classes of people consume different types of commodities and even these same type of, commodities are not consumed in the same proportion by different classes of people., So, CPI constructed separately for different classes of people to study the effect of rise or fall in prices of, different types of commodities., , Construction of CPI, The steps involved in construction of consumer price index are:, I., , Determining the scope and coverage of the index:, The first step is to decide the particular class of people, for whom the index numbers is intended,, such as industrial workers, government employees etc., II. Family budget Enquiry, , The next step is to conduct a family budget enquiry., , The enquiry should be conducted in a normal period of economic stability., , It helps in finding out how much an average family of this group spend on different items of, consumption., III. Obtaining price Quotations, The third and the last step is to collect retail prices. The following broad principles are observed:, , The retail prices should relate to a fixed list of items and for each item, the quantity should, be prefixed., , Retail prices should be those actually charged from the consumers., , Discount for cash payment and interest rate for payment should be taken into account., , In a period of rationing or price control, where illegal prices are charged openly, such prices, should be taken into account along with the controlled prices., , Methods of constructing CPI, The consumer price index numbers are constructed by the following two methods :, I., II., , Aggregate Expenditure method, or Weighted Aggregated method, This method is similar to Laspeyre’s method of constructing weighted index., Family budget method, In this method , the family budgets of a large number of people, for whom the index is meant, are, carefully studied., Step 1., Step 2., , Step 4., , Calculate price relatives for the current year, × 100 and denote it by R., Multiply the price in the base year (p0) with quantity in the base year (q0) to calculate the, weight of a commodity i.e to get W., Multiply the price relative (R) with weight (W) of each commodity and obtain its total to get, ∑RW., Obtain the sum total of weights to get ∑ 𝑊., , Step 5., , Apply the formula of consumer price index i.e, , Step 3., , ∑, ∑, , .

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Difficulties in construction of consumer price index:, , , , , As it uses retail price, which vary from shop to shop, place to place and consumer to consumer. Therefore,, index numbers prepared on such prices cannot be used for different places or different classes of people., It indicates so many commodities of unstable quality, which will not be used at different point of time., The ratio of expenditure on different commodities at different point of time and by various person are not, same, which creates difficulties in construction of cost of living index numbers., , Uses of consumer price index, , , , CPI helps in wage negotiations, formulation of wage policy, price policy, rent control, taxation and general, economic policy formulation., It is used by government and business units to regulate the Dearness allowance (DA) or grant of bonus to the, employees in order to compensate them for increased cost of living due to price rise., , , , It is used to measure purchasing power of consumer in rupees. i.e. PP =, , , , It is also used for analyzing markets for particular kinds of goods and services., , × 100