Calculating the CPI/RPI:

    0
    49

    Calculating the CPI/RPI:

     

    • Indices express change in prices of a number of different products as a movement in a single number.
    • Average of ‘basket’ of products in first year calculation or base year is given the number 100.
    • If on average the basket rises overall by 25% next year, then index becomes 125.
    • If in second year it rises another 10%, then 125 x 1.1 = 137.5 – 37.5 becomes average price rise in two year period.
    • To construct a CPI, a sample of households are taken and surveyed – their spending patterns observed for 12 months which is the base year. The proportion of income spent on each category is recorded.
    • Average prices of different goods and services (minus fuel and food) are recorded from a sample of shops.
    • The proportion of income spent on each category is used to weight average prices of each type of good/service to find their weighted average prices.
    • This shows how big an impact a change in price of a particular type of good or service will have on cost of living for the average household.
    • The proportional of household income spent on a certain type of good/service is multiplied by the average price of the good/service purchased in the category, to generate its weighted average price – these weighted prices are then all added together, which is the overall average price for goods and services in the basket.
    • The weighted total price of the basket can be compared each year to work out percentage changes in average consumer prices.

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here