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Mrunal [Economy Q] Base year and Current year price? How to calculate WPI and CPI? Print

[Economy Q] Base year and Current year price? How to calculate WPI and CPI?
Question . Ive come across these terms numerous times, but couldnt make anything out. Whats all these about Base year prices and Current year prices while calculating economical statistics? Tell me what is inflation? Its the increase in the price of a product. How can you say there is inflation? Because, earlier in the year 2001, we could buy a litre of petrol for Rs.50, but now its Rs.70/- per litre. So there is price-rise and hence there is inflation. Means you need to compare the current price, with some old price to say that the price has increased (or decreased), right ? Hence, to calculate the inflation (CPI,WPI) well need to compare the price of some item for two different years. Suppose Price of a lifebouy soap was Rs.10 in 2001. And now it has increased to Rs.12 per bar. So what is the % increase? [(12-10)/10]*100=20% incrase in the price of a soap.

What did we do, in above formula?

We took 2001 is the base year and 2011 is the current year. Then we divided the change in price, with the price of base year and multiplied it with 100 to get the percentage. If price of a soap was Rs.1 in 1950s (dont get excited because in those days, monthly income of most middle-class people was around 100-300 Rs, so one rupee was a big amount.) So with 1950 as base year, whatll be the % price increase? [(12-1)/1]*100=1100% increase in the price of a soap! But does it make any sense to calculate inflation with such an old base year? Ofcourse
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Mrunal [Economy Q] Base year and Current year price? How to calculate WPI and CPI? Print

not, because lot things have changed after 1950, including the salaries of the middle class people. So you wont get the real picture. Inflation is a hurt-meter. You cannot fathom how much it hurts now, if you didnot feel less pain earlier. Those who lived in 1950s are all either dead or retired. And the current-working population never actually bought a soap for 1 rupee. So how much is the soap price hurting the current-population, to know that answer, you need to set the hurt-meter to compare the prices of recent memory: oh yeah back in 2004 it was only 10 rupees and now its 12 so yes I can feel it hurting me. Morale of the story: We need to have the base-year at some near-past level like 200405 to get the real picture of inflation. (Earlier this base year was about 1993-94) Now lets get a lil technically correct, above post was written to clear the basic concept of base year and current year only, the CPI and WPI are not calculated so straightforward.

How to calculate the WPI or CPI?

Price of a bike was 30,000 in 2004 and now its close to 55,000/-. Price of one litre milk was 25 Rs. in 2004 and now it is almost 60/- (After Sharad Pawar advised all the dairies to buy an alarm, which rings at paheli taarikh every month to remind them to increase the price without fail) So, What hurts to you more, or what hurts the people at large: bike price or milk price? ofcourse the milk price inflation because you need to buy it every day. So when calculating the inflation, you need to weight the products according to their usage.

The weightage given in WPI

It is something like this 1. Primary Articles (food,fruits etc):22% 2. Fuel, Power, Light & Lubricants :14% 3. Manufactured Products (biscuit,toothpaste):63% Now survey the prices of all items in the base year and in the current year. Then you plug them in the Lesperes Formula for weighted arithmetic mean. (Formula is not important, but what is important for you to know is, that it is not a simple average but a weighted average) And you get a number, we call it the WPI index number for the given year or given week or given month. Suppose after calculation you get a number 110 on 1st August 2011. For base year we assume that WPI is 100. So there is 10% inflation.
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Mrunal [Economy Q] Base year and Current year price? How to calculate WPI and CPI? Print

i.e. [110-100/100]*100 Now on 1st September 2011, you calculate again with new price data and the number is 112. What does that mean? The inflation has increased by 12% compared to compared to base year AND inflation has increased by 1.8% compared to last month. i.e. (112110)/110*100

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