4.5.1 Cpi Flashcards
What is inflation?
A situation of a sustained rise in the general level of prices in an economy over a period and when the value of money falls.
This does not mean that the price of every good and service increases, but on average the prices are rising.
What does inflation indicate?
Inflation means an increase in the cost of living as the price of goods and services rise.
What is the rate of inflation?
The rate of inflation measures the annual percentage change in the general or average price level.
What is deflation?
Deflation is the opposite of inflation; it occurs when the prices of goods and services in an economy are falling.
What is the rate of inflation during deflation?
The rate of inflation is negative during deflation.
What is the consumer price index?
The consumer price index is a statistical device that indicates changes in the general price level from the base year to the current year, measuring the changes in the value of money.
What does the consumer price index measure?
The consumer price index measures the cost of a basket of goods and services purchased by the average household.
How is the consumer price index calculated?
It is calculated by choosing a basket of goods and services purchased by the average household, dividing them into categories, assigning a weight to each category based on the proportion of total expenditure spent on it, choosing a base year, and measuring the prices of the goods and services in the current year as well as in the base year.
What are nominal values?
Nominal values are the values of the prices operating at the time.
What is real data?
Real data is data in real terms and has been adjusted for inflation.
How is real data measured?
Real data is measured by multiplying the nominal value by the price index in the base year and dividing by the price index in the current year.
How do you calculate real income?
Real income = nominal income x CPI Base Year / CPI Current Year.
What happens to real income if nominal income increases by the same percentage as the price level?
Real income remains unchanged.
What is the usefulness of the CPI?
The CPI is useful for calculating adjustments to nominal income to maintain constant or increasing real income.
What is a limitation related to the selection of the base year for the Consumer Price Index?
The selection of the base year is arbitrary and raises questions like ‘Normal to what extent?’ and ‘What is an ideal year?’.
What is a limitation regarding the selection of the basket of goods?
The selected goods may not be representative of the whole population, as they often reflect the preferences of a certain class.
What issue arises with the prices of the selected goods in the Consumer Price Index?
Prices fluctuate widely, making it difficult to determine an average price, and the selection of goods can be arbitrary.
What does weightage refer to in the context of the Consumer Price Index?
Weightage refers to the relative importance of goods based on the portion of income spent on them, which varies among individuals.
What are sampling errors in the context of the Consumer Price Index?
Sampling errors occur because the Consumer Price Index is not an exact measurement and can deviate from actual retail purchase records.
What is a limitation related to inaccurate information in the Consumer Price Index?
Inaccurate reporting by individuals can lead to errors, although efforts are made to minimize and correct these errors.
