Inflation

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 Price Indices
• A Price Index expresses the current price in relation to
its value in the base period. The price index for period ‘t’
for a given good/service is measured as
Pt
• PIt = -----
Po
where
• PIt = Price Index for period ‘t’ with base (period ‘0’) =
100;
• Pt = price of the given good/service in period ‘t’; and
• Po = price of the same good/service in period ‘O’.

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 General Price Index

Pit
PIt =  Wi ----------
Pio
where Wi denotes weight of good/service i;
Wi  0 and  Wi = 1
Pit denotes price of good/service ‘i’ in period ‘t’ and Pio
denotes price of good/service ‘i’ in period ‘o’.

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 General Price Indices
• LASPEYRE’S INDEX

• PAASCHE’S INDEX

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 LASPEYRE’S INDEX
Pit
PI t (L) =  Wi -----
Pio

Qio . Pio Pit

=  ------------ ----
Qio . Pio Pio

 Qio. Pit
= -------------- . . . . . . (A)
 Qio. Pio

Pit denotes price of good/service ‘i’ in period ‘t’ and Pio denotes price of
good/service ‘i’ in period ‘o’.
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 Paasche’s Index

Qit . Pio Pit

PI t (P) =  -------------- ----
 Qit . Pio Pio

 Qit. Pit
= -------------- ; . . . . . . . . . . . . . . . . . . . . . . . . . . . . (B)
 Qit. Pio

Pit denotes price of good/service ‘i’ in period ‘t’ and Pio denotes price of
good/service ‘i’ in period ‘o’.

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 Comparison between Laspeyre’s and
Paasche’s indices

• the Laspeyre’s index takes the base year

quantities, the Paasche’s index works with the
current year quantities. Since quantities of
different items do vary over time, the two
methods of computation could very well yield
different results.
• In practice, the Laspeyre’s method is more
popular, though the Paasche’s formula is used
for computing the GDP deflator.

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 SALIENT FEATURES OF PRICE INDICES USED IN INDIA
Sl.No CPI-UNME CPI-IW CPI-AL CPI-RL WPI
1 Weights allocated on Consumer Expenditure Survey Weights Allocated
the basis of based on Wholesale
transactions

First : First : First : First : 1983

1958-59 1958-59 1956-57 Latest :
Latest : Latest : Latest : 1983
1982-83 2001 1983
2 Base year of the 1984-85 2001 1986-87 1986-87 1993-94
current series
3 No. of items/ 146-365 120-160 260 260 435
commodities in the
basket
4 No. of centres/ 59 76 600 600 1918 quotations
Villages covered
5 Frequency Monthly Monthly Monthly Monthly Weekly

6 Time lag of the 2 weeks 1 month 3 weeks 3 weeks 2 weeks

index
7 Computing Agency CSO Labour Bureau Economic Adviser,
Ministry of Labour Ministry of Industry

8 Geographical level Centre-wise State-wise State-wise State-wise All India

of the index data
Note : Prepared on the basis of information available in the Economic Survey, 2006-07, Govt. of India 8
 RATE OF INFLATION (PER CENT) BASED ON DIFFERENT
INDICES
WPI CPI-UNME CPI-IW CPI-AL CPI-RL

2001-02 3.6 4.3 5.1 1.1 1.3

2002-03 3.4 4.0 3.8 3.2 3.1
2003-04 5.5 3.9 3.7 3.9 3.8
2004-05 6.5 3.8 3.6 2.6 2.6
2005-06 4.4 4.4 4.7 3.9 3.9
2006-07# 5.0 6.6 6.3 7.2 6.9
# April-December 2006

Note : Prepared on the basis of information available in the Economic Survey, 2006-07, Govt. of India