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Niveshak Interview Booklet

# Niveshak Interview Booklet

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04/24/2015

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Finance Club IIM ShillongPage|
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Inflation, Stagflation, Disinflation, Deflation, CPI and WPI

Since India has been witnessing unprecedented rise in inflation rates which has burnt a hole in tax
payer’s pocket one may be curious to know about inflation in greater depth. Put in simple terms inflation
indicates the rise in general price level of goods and services in an economy. If price of goods andservices increases then naturally the buying power of money will decrease as one can buy fewer goodsand services with each unit of currency. Let us take an example suppose one week earlier you went tohave breakfast in a nearby restaurant and you have taken a 50 rupee note with you. If the price a piece of sandwich was Rs. 10 price then with you could buy 5 sandwich pieces. Now over the week the prices of bread and vegetables have gone up on account of inflation and as a result the restaurant has increasedthe price of a piece of sandwich to Rs.12.5. Now you can only buy 4 sandwich pieces with the same 50rupee note today.Now you may be thinking as to how one can measure inflation. The answer to your question is
inflation

rate
, the measure of rise in price level of goods and services. It indicates the rate of rise in price level of goods and services. Given the large number of goods and services produced in an economy it is notfeasible to calculate the average change in price level of all goods and services. Consequently arepresentative basket of goods and services (also known as market basket) is used for which the changein price is calculated to get an indicative figure of change in overall price level, which is called inflationrate.Mathematically
inflation rate
is calculated as the percentage rate of change of a certain price index.Generally each commodity in the market basket is linked to an index and the index has a certain value(usually 100) in a particular year known as base year which is proportional to the price of commodity. Thisindex value keeps changing over time in proportion to change in price of commodity. The index for marketbasket is calculated as the weighted average of the individual index of commodities where eachcommodity has been assigned a particular weight based on its influence in economy. The index for market basket is used for calculation of inflation rate. If the index values for the beginning and end of year are known then the inflation rate for year is the percentage change in index value for year.The measurement process will become clearer with a simple example that is being provided here. Let usconsider the market basket has only one product say rice. Assume the base year for index to be 2000and corresponding index value to be 100. Let the price of sugar in base year is Rs. 5. Now suppose wewant to calculate the inflation rate for year 2009. For this as mentioned earlier we need to calculate theindex values at beginning and end of year 2009 which can be done using the price of sugar on the

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Amazing. Its one of the most comprehensive things i have ever come across.
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