1. 5.2
CONSUMER PRICE INDEX

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.
AZIZAH ISA. UiTM KELANTAN

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
AZIZAH ISA. UiTM KELANTAN

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.
AZIZAH ISA. UiTM KELANTAN

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.
AZIZAH ISA. UiTM KELANTAN

6. 3 steps in Constructing CPI
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.
Select the base year or period of reference.
AZIZAH ISA. UiTM KELANTAN

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

8. Example 1: Calculating CPI (without weight given)
Goods
Price in 2000
(RM)
Price in 2007
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:
Calculate the simple CPI for year 2007 for all the 4 goods.
Calculate the general price index or average CPI for year 2007.
AZIZAH ISA. UiTM KELANTAN

9. Solution to Example 1: = = CPI = P1 X 100 P0 CPI2005 = CPIF + CPIC +
CPIT CPIE
200.00 X X
100 + X
100
100 = + + X
100
5.00
30.00
16.00
150.00 =
( ) =
146.3 4
General / Average Price Index for year 2005
AZIZAH ISA. UiTM KELANTAN

10. Weighted CPI WCPI = X 100 P1 100 X W = P0
Current Year basket consumption cost / price
Weightage
Value
X 100
Base Year basket consumption cost / price P1
100 X W = P0
AZIZAH ISA. UiTM KELANTAN

11. Constructing the general / average WCPI
WCPIN = WN P1 X 100
P N
(for each good)
General WCPI =
Total Weighted Price Index of consumption basket
Total Weight PI X
100
WN PIN ∑ WN P0 N = ∑ = W ∑ W
W1PI1 +W2PI2 +W3PI3 + …… + WNPIN =
W1 + W2 + W3 + …………..+ WN
AZIZAH ISA. UiTM KELANTAN

12. 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
Compute the WPI for each item in the year 2007.
Compute the general WPI for 2007.
Compute the percentage change in the price level between the base year and 2007.
Calculate the change in value of money between the base year and 2007.
Calculate the real value of money in the current year.
AZIZAH ISA. UiTM KELANTAN

13. Solution to Example 2: (i & ii)∑
WN PIN
WCPI =
∑ W
20.00
200.00
8.00
50.00 +
100 X
100 + 3 X 2 X X + 1 X X
100 4 X X
100
150.00
5.00
30.00
16.00
GWPI =
152.3 = = 10
General Weighted Price Index for year 2007
AZIZAH ISA. UiTM KELANTAN

14. CPI is used to measure Inflation
Inflation Rate = % change in prices or CPI
= Current year PI – Base year PI
Base Year PI
= CPI1 – CPI0
CPI0
100 X
X 100
(% Change in General Price Level)
AZIZAH ISA. UiTM KELANTAN

15. 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
CPI0
= – 100
100
= %
100 X X
100
AZIZAH ISA. UiTM KELANTAN

16. Changes in the 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
PI1
(as inflation rises, value of money falls.
X 100
AZIZAH ISA. UiTM KELANTAN

17. Changes in the value of money
iv) Calculate the change in the Value of Money between the base year and 2007.
Changes in the value of money
= – PI0 x 100
PI1
= – x 100
152.3
= –
= %
Because of inflation (or higher prices) the value of money
falls by 34.3%.
AZIZAH ISA. UiTM KELANTAN

18. v) Calculate the real value of money in the current year.
= PI0 x 100
PI1 
= x 100
152.3
  = 65.7
AZIZAH ISA. UiTM KELANTAN

19. Example 3:
Given the following information of consumer
price indexes for an economy in the years between
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.
YEAR
Consumer Price Index
2000 98
2001
100
2002
105
2003
103
AZIZAH ISA. UiTM KELANTAN

20. Solution for Example 3: Inflation rate:
a)        between the year 2001 to 2002
105 – X = – = 5%
100
b)        between the year 2002 to 2003.
      103 – X = – 2 X 100 = – 1.9%
(deflation)
AZIZAH ISA. UiTM KELANTAN

21. Exercise1: Let’s Try This!
Goods
Price in 2003
(RM)
Price in 2007
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:
Calculate the simple CPI for year 2007 for all the 3 goods.
Calculate the general price index or average CPI
for year 2007.
AZIZAH ISA. UiTM KELANTAN

22. Solution to Exercise 1: = = CPI = P1 X 100 P0 CPI2006 = CPIB + CPIF +
CPIS = + X
100 + X
100 X
100
4.50
35.00
15.00 =
( ) = 3
General / Average Price Index for year 2007
AZIZAH ISA. UiTM KELANTAN

23. Exercise 2 : LETS TRY THIS!
Goods
Price in 2003
(RM)
Price in 2007
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:
Calculate WCPI for all the 3 goods in the year 2007.
Calculate general or average WCPI for year 2007.
AZIZAH ISA. UiTM KELANTAN

24. Solution to Exercise 2: ∑ WN PIN WCPI = ∑ W = = = 156.72 27.00 55.00 +
6.50 + + 1 X X
100 2 X X
100 3 X X
100
15.00
35.00
4.50 =
2+3+1 = =
156.72 6
AZIZAH ISA. UiTM KELANTAN

25. Formula to calculate Real GNP or Real Income
Price Index Year 0 or Base Year (PI0)
Real GNP (Year 1)
Nominal GNP (Year 1) = X
Price Index Year 1 or Current Year (PI1)
rGNP = nGNP X PI 0
PI 1
rY = nY X PI 0
PI 1
AZIZAH ISA. UiTM KELANTAN

26. Example 4: How to convert the nominal GNP to real GNP ?
Year Nominal GNP Price Index Real GNP
RM345,788 million
RM550,100 million
RM875,570 million
AZIZAH ISA. UiTM KELANTAN

27. Solution for Example 4: How to convert the nominal GNP to real GNP?
Year Nominal GNP Price Index Real GNP
RM345,788 million
RM550,100 million
RM875,570 million
RM345,788 mil
RM407,481.5 mil
RM550,672 mil
AZIZAH ISA. UiTM KELANTAN

28. Rate of growth (g): g Real GNP Year 1 – Real GNP Year 0 X 100 =
AZIZAH ISA. UiTM KELANTAN

29. 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

30. Solution to Example 5: a) Real GNP for year 2002 = 6,110m X 100 112
= RM5, million
b) g = ( – 5100) X
= 6.96%
AZIZAH ISA. UiTM KELANTAN

31. 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

32. Question to Ponder (3): LET’S TRY THIS! Calculating WCPI
Goods
Price in 1995
(RM)
Price in 1998
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
Taking 1995 as the base year. Calculate the weighted price index for 1998.
Calculate the percentage change in the general price level between 1995 and 1998.
Calculate the percentage change in the value of money between 1995 and 1998.
AZIZAH ISA. UiTM KELANTAN

33. Solution to Question To Ponder (3):∑
WN PIN
WCPI =
∑ W
27.00
300.00
6.50
55.00 +
100 X
100 + 3 X 2 X X + 1 X X
100 4 X X
100
15.00
250.00
4.50
35.00
GWPI =
153.4 = = 10
General Weighted Price Index for year 1998
AZIZAH ISA. UiTM KELANTAN

34. c. % change in the value of money
= – PI0 x 100
PI1
= – x 100
153.4
= 100 – 65.2
= %
AZIZAH ISA. UiTM KELANTAN

35. Have A Nice Day! THANK YOU. 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

36. THANK YOU.
THAT’S ALL
FOR
TODAY
AZIZAH ISA. UiTM KELANTAN

37. Which year is the base year? Give your reason.
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
102
Clothes 4 96
Transportation 2
110
Which year is the base year? Give your reason.
Comment on the changes in the price of clothes between 1996 and 1998.
Calculate the weighted price index for each of the goods in both years.
What had happened to the general price level between the two years.
What are the types of goods would you include in your calculation of price index?
AZIZAH ISA. UiTM KELANTAN

38. Calculate the real GNP for year : i) 1999 ii) 2000 iii) 2001.
ECO 211 / SEPT 2002
The table below shows the value of nominal GNP and price index for a country for 3 years.
Year
1999
2000
2001
Price Index
100
110
112
Nominal GNP
(RM Million)
35,000
43,000
48,000
Calculate the real GNP for year :
i) 1999
ii) 2000
iii) 2001.
b) Calculate the rate of economic growth between years:.
i) 1999 – ( based on real GNP)
ii) 2000 – 2001 ( based on nominal GNP).
AZIZAH ISA. UiTM KELANTAN

39. Goods Price (RM) Weight 1990 1995 X 1.00 1.50 3 Y 3.00 4.00 2 Z 2.00 5
ECO 108 / APR 2001
The following table shows the prices for 3 types of goods for the year 1990 and 1995
Goods
Price (RM)
Weight
1990
1995 X
1.00
1.50 3 Y
3.00
4.00 2 Z
2.00 5
Given the base year as 1990, answer the following questions:
Calculate the weighted price index for 1995
Calculate the inflation rate between 1990 and 1995.
Explain three problems that occur in the construction of the consumer price index.
AZIZAH ISA. UiTM KELANTAN

40. Use this information to answer the following questions
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
Calculate the real GNP for year 1998 and year 1999.
Calculate the nominal GNP per capita for 1999.
Calculate the percentage change in real GNP between to 1999
AZIZAH ISA. UiTM KELANTAN

41. Economic rate of growth (%)
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
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

42. i) Find the ‘weights’ assigned for each good
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
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)
CPI
Real GNP
2000
211,348
2001
467,100
148
2002
153
538,268
Calculate the missing values in the above table
Find the economic growth rate between 2001 and 2002
AZIZAH ISA. UiTM KELANTAN

43. Multiple Choice questions
The rate of economic growth is best defined as
A. increase in investment as a % of GDP over time B. % increase in nominal GDP over time
C. % increase in real GDP overtime 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

44. 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. Excludes net exports and personal income tax
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
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 %
C. 3.8 % D %
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 % B %
C % D %
AZIZAH ISA. UiTM KELANTAN