3.1 Macro Aggregates
(A) Meaning : We have briefly drawn a distinction between micro and macro economic branches of analysis: microeconomics mainly deals with individual and small units of economic activities, whereas macroeconomics is more concerned with aggregate economic activity at the social and national levels. It deals with aggregative quantities and problems arising out of them, such as supply of money, national consumption, investment, level of effective demand, government spending, proportion of national income saved, annual growth of the economy, foreign trade, balance of payments and rate of exchange. All such macro level transactions are conveniently quantifiable and can be subjected to a mathematical approach. It is concerned not only with a fuller utilization of all existing resources such as labor, power, land, raw materials, machinery and equipment, but also with the increase of all potential resources. All such resources, supply and utilization activities relate to a very long span of time. Expectations of future changes and uncertainties about these components make the whole framework of macroeconomic analysis dynamic in nature.
(B) Its Growing Importance :The first half of the twentieth century in the form of the World War I (1914 - 18), the period of the Great Depression (1929-33) and the World War II (1939-44) taught the world an important lesson: that free and private enterprise economy is shaky in its foundations. If left uncontrolled it may cause several problems leading to grave crises and injustices to various sections of the society. Modern public authorities therefore collect large sums of national resources to the extent of about 30 to 35 percent of the national income to be allocated to public expenditure. Such an ever-increasing public expenditure enables public authority to perform a variety of regulatory, welfare-oriented and developmental functions. Some of them can be stated as:
i) Regulatory functions include maintenance of stability, high levels of employment, income and effective demand.
ii) Welfare functions include redistribution of income, alleviation of inequality and poverty, war and defense expenditure
Developmental functions include maintenance of high and steady rate of growth of real national income, avoidance of inflation and compensatory or functional finance policies. Lord Keynes in his General Theory (1936) has made it clear that a free enterprise economy is subject to periodic fluctuations and instability. Hence the undertaking of large-scale public expenditure to maintain high levels of effective demand, output and employment is required. Again a free market economy has a strong tendency towards a biased distribution of national income; more in the favor of the richer sections of society. This needs to be corrected through progressive taxation measures in order to promote social welfare. Finally, the experience of the two menacing wars has led the nations to undertake large-scale defense expenditure and to organize technically superior defense systems. Again maintenance of high levels of effective demand and employment is only a short-term goal. In the long run, it assumes the form of steady growth rates of the economy and of national income. Such a growth rate is expressed in the light of Harrod-Domar models in terms of two coefficients. These are the savings - investment ratio (S) and capital - output ratio (C). If the values of these two coefficients are known then the growth rate (g) can be expressed as a ratio of the two coefficients. Thus we have,
If we assume value of S as 20% and value of C as 4% then growth rate will be 5%.
It may be noted that value of 'g' depends directly on S and hence greater the ability of the society to save and invest, greater would be the growth rate. On the contrary, value of 'g' depends inversely upon C i.e. the capital - output ratio or the technical conditions of production. Hence if productive methods are more efficient and if a lower value of the C can be maintained, then the value of growth rate 'g' would be higher. The public authorities have to adopt suitable measures to achieve these ends. Most of the modern governments resort to some sort of planning to achieve these objectives.
(C) National Aggregates: National income is the primary macro aggregate. But measurement of national income is a highly complicated activity. This is clear from the definition of national income stated by Alfred Marshall. Accordingly, in a simplified form we have,
National income is the money value or market price value of all the goods and services produced by the national citizens of a country during every financial year.
Several terms in this definition such as 'money value', 'market price', 'all goods and services', 'national citizens' result into variety of conceptual (related to definition) and practical difficulties. Moreover, the statistical methods employed for the purpose of the measurement of national income are not completely resistant to errors. Consequently what we expect is an approximation and a less exact value of national income than the value of millions of economic activities actually performed by numerous citizens of the country. One way of minimizing the error element is to measure national income employing various approaches and express them in distinct national aggregates. All these national aggregates are however mutually related and serve the purpose of a self correcting device of aggregative values to make them as accurate as possible.
GDP and GNP: The first pair of the national aggregates in the form of Gross Domestic Product and Gross National Product values. The value GDP is the result of all productive activities carried out within the country. Therefore GDP is a geographic concept. By and large we are primarily interested in the GDP value. But in modern times there are large-scale international transactions taking place between countries as well. Citizens of a country like technicians, doctors, lawyers, bankers etc. go abroad and earn considerable incomes. This should genuinely form part of the national income of a country. But it is not earned within the territory of the country and hence is not included in the GDP. If we want to compute GNP such income (N) earned abroad will have to be added to GDP. On the contrary foreign citizens may be working inside the country and contributing to the value of the GDP. Since they are not the nationals their contributions (F) will have to be deducted to arrive at an accurate value of the GNP. In other words net of the income earned abroad (N-F) when adjusted to the GDP gives the GNP.
GDP + (N -F) = NNP
For example, assume the values of GDP, N and F as 1780, 230, 310 respectively. Then,
GNP = 1700
GDP + N - F = GNP
1780 + 230 - 310 = 1700
On the other hand, if we begin with GNP then the reverse operation will be necessary.
GNP- N+F = GDP
1700 - 230+310 = 1780
Note that GNP will be more or less than GDP according to relative amounts of N and F. If N will be greater than F then GNP would be greater than GDP but if N will be less than F, GNP will be smaller than GDP (Hence GNP < GDP).
ii) GNP and GNI: Whereas Gross National Product (GNP) is the total of the market price values of all goods and services, Gross National Income (GNI) is the aggregate income received by all members of the society engaged in productive activities. Whenever goods are produced and sold, the total yield gets distributed among various agents of production. There are theoretically four such categories which contribute to productive activity and receive income. The four shares in the income are profits of the producer (P), wages of the labor (W), rent of the owner of land and natural resources (R) and interest payment on loans and capital transactions (i).
Therefore the value of GNI can be stated as : GNI W + R + P + I
For every income generated, there is some corresponding productive activity performed and vice versa. Therefore, the two values GNI and GNP must be conceptually identical.
GNI = GNP
But in practice there is some disparity between these two aggregates arising out of various causes. There may be some members in society who live on doles and hence earn income without performing any productive functions. On the other hand some part of the goods produced may not be marketed but utilized for self-consumption. Again there may be serious errors in computation or others which may cause some difference in these two values.
iii) GNI and NNI: The distinction between Gross and Net values of the national income has both theoretical and practical significance. The adjustment factor is Depreciation charges (D) against the utilization of the services of the stock of capital goods while producing current output. Such capital goods are of longer duration and have to be replaced a few years after their utility is over. Such an allowance for wear and tear of the fixed capital equipment is also known as capital replacement (Cr) cost. The two values (D and Cr) are somewhat different in their computation and purpose. Though it is difficult to accurately predict the future replacement cost of the present capital assets, the usual procedure is to set aside a certain percentage (say 8 to 10 percent) of the national income in the form of depreciation charges. This adjustment is done as follows :
GNI - D = NNI
In our example,
1700 - 170 = 1530 where D = 170 (10% of 1700)
The reverse operation will be:
NNI + D = GNI, or 1530 + 170 = 1700
The significance of the depreciation allowance can be explained with the help of a simple example. If a farmer produces 200 quintals of grain every year then the entire produce cannot be marketed or used for his family consumption. He will keep aside say 10 quintals, to be used as seeds for the next harvest. In this case seeds worth 10 quintals is the depreciation allowance in the absence of which no output can be produced in the next harvest.
Only after making the adjustment of depreciation charges what remains in the form of NNI is available for current consumption purposes. Hence it should be understood that the term 'national income' in this analysis refers to it in its net form.
iv) NNI(MP) - NNI(FC): Another important distinction is between NNI in its market price value and NNI in its factor cost value. When national income value is computed in terms of market prices, the presence of two elements may not allow for the estimation of the true factor expenditure or cost of production of these goods. These two elements contained in the market price are indirect taxes (IT) such as sales tax, excise duty etc. and subsidy (S) or assistance in cash and kind provided by the government to private producers. The estimate of NNI will exceed the true cost of production to the extent of the IT value. On the other hand the presence of subsidies unduly reduces the correct value than what it would otherwise have been in the form of cost of production. Therefore the value of indirect tax is to be deducted and that of subsidies is to be added to the estimated value of NNI at market prices in order to arrive at the factor cost value of the NNI. With these adjustments we have:
NNI(MP) - IT + S = NNI(FC) , or
1530 - 460 + 120 = 1190 where IT = 460 and S = 120
In its reverse form:
NNI(FC)+ IT - S = NNI(MP)
1190 + 460 - 120 = 1530
In macroeconomics national income value (NI) is stated in its factor cost version. Therefore unless otherwise stated we will refer to this value as NI (that is National Income at factor cost).
v) NI, PI, DI: After the explanation of the process of arriving at the value of NI, two further operations need consideration: these make it possible to arrive at disposable income (DI) and personal income value (PI). These are other important national aggregates in the system of income accounting.
Let’s begin with personal income (PI) value. In modern times with an increased public expenditure, the government carries undertakes a considerable amount of transfer of incomes in the form of gifts, loans, assistance etc. Some citizens may also receive similar donations from foreign countries. With such gratuities the individual’s capacity to spend will be enhanced. However, this additional compensation is not a part of the NI. On the other hand big corporate agencies are subjected to corporate tax to the extent of which national income reduces before it falls in private hands. Some corporate bodies may also set aside part of their profits in an undistributed (UP) form to be utilized for future investment, which further reduces the size of the NI before it becomes Personal Income. Therefore we have:
NNI - (CT + UP) + Unearned income = PI
1190 - (80 + 90) + 310 = 1330
where CT = 80, UP = 90 and Unearned income = 310
In a reverse operation we have:
PI - Unearned Income + (CT + UP) = NNI
1330 - 310 + 170 = 1190
While moving on from personal income to disposable income (DI) we need to make some further adjustments. The entire personal income is not available for disposal and for private consumption or investment expenditure. Part of the Personal Income is taxed away in the form of personal income taxation (PT). The value of Disposable Income will be smaller than that of Personal Income to the extent of the tax. We have then:
PI - PT = DI
1330 - 130 = 1200, where PT = 130
In its reverse form:
DI + PT = PI
1200 + 130 = 1330
vi) Recap of the aggregates: After having defined and explained various national aggregates let’s review them. Aggregates are to be interpreted as values in millions or billions in the currency of respective countries such as dollars, pounds, marks, francs, rupees, yens etc.
1. GNP = GNI = 1700
2. GDP = GNP - N + F = 1700 - 230 + 310 = 1780
3. NNP = GNP - D = 1700 - 170 = 1530
4. NNPMP = 1530
NNPFC = NNPMP - IT + S
=1530 460 + 120
=1190
5. NNPFC = NI = 1190
PI = NI - (CT + UP) + 4
= 1190 - (170) + 310
= 1330
6. PI = 1330
DI = PI - PT
= 1330 - 130
= 1200
(D) Methods of Measurement: Measurement of national income, though important, is a very complex activity. Double counting, omissions, statistical errors etc. may cause considerable inaccuracy in the measurement of income.
It was only during the last two decades of the 19th century that systematic attempts were made to measure national income. Since then economists have from time to time introduced various devices to widen the coverage and to reduce the degree of inaccuracy in the process. In particular, the efforts of Nobel laureates like Dr. Richard Stone of the U.K. and Dr. Simon Kuznets of the U.S. are worth mentioning. Dr. V.K.R.V. Rao of India has also carried out useful research in this respect. Yet the complex nature of national income accounting demands three different methods of measurement to ensure the greatest degree of accuracy. These are product, income and expenditure methods. These three methods are complementary to each other and all of them are employed according to convenience.
i) Product method: Under this method the market values of all goods and services produced are aggregated to arrive at the national income value. If proper records are maintained of every small and private productive activity then this method should provide satisfactory information. But this method has limited significance since it suffers from certain drawbacks. First, under product method care has to be taken to include values of the final products. The values of intermediate products should be excluded in order to avoid double counting. For instance, if we consider the case of garment manufacturing industry; the raw materials pass through various stages before it is transformed into the final product. These include production of cotton thread, cloth and garments.
Therefore we have to include in the national income only the value of the ready-made garments as final products, plus the value of some amount of cotton thread and cloth which might have been used for direct consumption. Second, the product method emphasizes production of tangible goods. Therefore it is possible that useful services such as those of teachers, musicians etc. get excluded or underestimated. Third, under product method, part of the goods produced such as grains, vegetables, fruit etc. may not be marketed at all but used for self-consumption by the household members of the producers. Evaluating the contribution of non-marketed products and to add this to the national income becomes a difficult task. Hence the value of this method is limited.
ii) Income method: This is the simplest and most convenient method of computing national income. As per convention all possible incomes earned, fall under one of the four categories. These are wages (W), rent (R), profits (P) and interest (i). When these four categories of income are aggregated at the national level and added up, we get the total of the national income.
NI = W + R + P + (i)
Though this method is simple it is not quite satisfactory and cannot provide the most accurate information about the value of the national income. Some of the weaknesses that this method suffers from are:
a) All possible occasions of earning income are never accurately recorded therefore information available is often incomplete. Government administration, big corporations, factories, semi government organizations etc. maintain their wages, salaries and profit accounts. But large number of small units, self employed persons, small artisans etc. hardly maintain any accounts and even when accounts are maintained they do not supply the requisite information.
b) While collecting income information we have to rely upon the statements of the individuals but which may not be necessarily authentic. Some people deliberately understate their income. On the other hand some people overstate their income and make it appear that they are richer than what they are.
c) National income value is expected to correspond with national production of goods and services. But when part of the product is not marketed no income will be earned, yet the product value needs to be taken account of. This sort of difficulty arises in all such cases where a part of the goods produced or possessed is used for direct and self-consumption.
d) The case is the opposite when unproductive income is earned. There may be some people receiving government transfer earnings in the form of unemployment doles, pension or insurance assistance. Though these are incomes there is no corresponding productive activity and hence need not be included in the national income accounts. The incomes earned illegally by a section of society such as criminals, smugglers etc. should also not find place in the national income accounting.
e) Finally, there are some borderline cases. Some sections of the society are either not paid or are underpaid for the services that they render which are otherwise valuable. Housewives, social reformers, voluntary agencies fall under this category. The national income account remains inaccurate to the extent that these services are not accurately evaluated, or no complete information is received about them.
iii) Expenditure Method: Both product and income methods have their own limitations. Therefore the expenditure method is often employed as an alternative or as a remedial measure. Lord J.M. Keynes has in his General Theory (1936) introduced highly simplified income and expenditure equations. These are:
Y=C+I Income approach
Y=C+S Expenditure approach
The value of national income (Y) is equal to total income earned either in the form expenditure on the consumption goods (C) on capital goods or investment (I). On the other hand, whatever income earned by the society is spent on purchasing consumption goods (C) or remains unspent and saved (S). The terms income and expenditure in this respect are relative and flexible. One person’s expenditure is another’s income and vice versa.
government expenditure (G) and foreign trade. Under the foreign trade sector a variety of to and fro transactions are continuously taking place. These are called imports (M) and exports (X). Whereas imports are liabilities for which the government has to pay to foreign producers, exports are assets for which payments are received. Therefore the value of imports tends to reduce and value of exports tends to enhance the national wealth or income. We therefore take account of the net worth (X - M) of foreign trade and make adjustments in the national income accounts.
The expenditure method is a useful device to collect and present information. Under this approach, we are only required to take account of the expenditure of the final products. We have therefore to exclude all such expenditure on intermediate goods and services. In this way double counting of intermediate goods can be avoided because of which, the national income estimate would be highly exaggerated in its value. In this respect, like the earlier two methods, this also has its limitations.
a) As noted earlier, those who receive pension, insurance and other benefits contribute to expenditure but do not contribute in a country’s productive activities in any way. All such expenditure will have to be set aside from the national income accounts.
b) On the other hand, part of the income genuinely earned may not be spent at all and not even be saved and deposited with the banks. Such a practice is called hoarding of income or of purchasing power. The national income accounts cannot be satisfactory to the extent of such hoarded income.
iv) Summary table: Let’s present income and expenditure methods of national income accounting in the form of a summary. But before we do so we have to introduce two adjustment factors which we have not taken account of so far. These are in the form of depreciation charges (D) and indirect taxes (IT). Market prices of goods and services are marked to the extent of indirect taxes and depreciation charges. Therefore these values form part of the aggregate expenditure. But they are not present in the aggregate income under the income method of measurement. Therefore in order to strike a balance between the two methods either we have to deduct (D + IT) from the expenditure side or add it to the income side. We have then :
| Expenditure A/c | Income A/c |
| Consumption C Investment I Government Expenditure G Foreign Trade (X- M) Minus [ Depreciation D Indirect Taxes + IT ] | Wages W Rent R Profits P Interest i |
OR
| Expenditure A/c | Income A/c | ||
| Consumption Investment Government Expenditure Foreign Trade | C I G (X-M) | Wages Rent Interest Plus [ Depreciation Indirect Taxes | W R I D +IT ] |
vi) Other Related Concepts
a) Inventory goods: A special mention needs to be made of the inventory goods which find an important place in the present national income accounts. This has not been mentioned earlier because it forms part of the current investment expenditure, other than consumption expenditure. It has three distinct elements. These are depreciation charges (D), expenditure on new capital equipment and goods produced or purchased, and inventories. We have already seen that depreciation charges enable replacement of the existing stock of capital. Therefore after excluding depreciation what remains is the net or current investment. But all of which is not the expenditure on the fresh purchase of the capital goods. Very often producers or sellers maintain large stocks of the goods in warehouses. These are not yet marketed but are available for marketing. Such stocks both of finished goods and of raw materials together constitute inventories of the producers. Normally producers have some quantity of inventories which are intended to be so, however sometimes there may also be unintended inventories, when part of the goods remain unsold. In either case these inventory goods form part of the business expenditure and act as a future asset. Therefore these are included in the context of net investment expenditure. At the end of the year each business firm shows its investment account which includes a value of such inventories.
b) Real and Nominal Income (Y): An important analytical distinction is to be made between real and nominal values of the national income. By definition national income is the total value of all goods and services at market price. Thus every year all productive activities are evaluated at current market prices for this purpose. This is however the nominal value of the national income. It is not ordinarily comparable with the national income value of the last or earlier years. This is because of the fact that market prices contain an element of inflation and to that extent actual or real changes in the national income are not accurately recorded by the nominal value. Therefore before any comparison is attempted between the national income estimates of two or more years it is necessary to make the prices uniform and price index applicable to adjust all such values.
The process is called conversion of nominal values into real value or conversion of national income from current to constant prices. This process can be applied to all national aggregates uniformly and thus nominal GDP, GNP, NNP, NNI etc. can be converted into their respective real values. Generally, national income is symbolically denoted as Y. For example take Y1 and Y0 as the national income values measured in current prices of respective years (say P1 and P0). In this case Y1 and P1 are national income and price values of the current year and Y0 and P0 are similar values of the base year or of the initial year with which the comparison is to be made. Then when Y1 value is converted into P0 price, such a conversion is known as translating nominal income Y1 (n) into real income Y1 (r). Let us assign numerical values to these variables:
But part of this income is only nominal and not real because of the corresponding rise in the price (from 4 to 5). This is clear if we divide each year’s nominal income value by the respective prices. In this way we can obtain real or physical variations in the units of goods produced. Thus in the year Y0 physical units of goods produced are Y0/P0 = 1600/4 = 400 and in the year Y1 it is Y1/P1 = 2400/5 = 480. Therefore real or physical increase in the volume of output produced is only 80 over 400 or it is 80/400 100 (that is 20%). This is exactly the extent of increase in the real income shown by Y1 (r).
20 percent is the increase as desired. Therefore conversion of current to constant price or nominal into real income value by multiplying it by P0/P1 ratio makes the comparisons realistic and enables to remove the element of inflationary price rise. The process is also therefore known as deflating current income into constant prices.
c) Deflator and rate of inflation: Deflator refers to the extent to which nominal income has been deflated or reduced in its value in order to convert it into its real value. It is a coefficient computed as follows:
In our example the value of the deflator will be,
or the deflator value is 25 percent. This is exactly the same proportion in which the prices of the two years have altered.
P1/P0 = 5/4 100 = 125 or 25 percent
Hence under the real income computation process we have removed the 25 percent effect of the rise in the price. Since to this extent we have deflated the value of nominal income, if we increase real income by 25 percent, once again we arrive at nominal income.
Thus we have 1920 + 25% = 1920 + 480 = 2400. Since real income on multiplication by deflator factor results into nominal income value it can also be called as conversion factor.
Deflator explains the rate of inflation. In the present case it is 25 percent. In a more systematic and general form rate of inflation can be stated as: 
In our example the price P1 is higher than P0 and hence there is an inflationary rise in the price level by 25% during Y0 to Y1 years. This is a normal case. But in an exceptional year if the current price is lower than the base year price the deflator value will be less than 100 and the rate of inflation will be negative. In that case it is called rate of deflation. Therefore when the rate of inflation is positive, an inflationary rise in prices has occurred, but if the rate of inflation is negative the price level is said to have deflated.
Growth rate of Y and P.C.: Computation of annual national income and its conversion into real or constant price value are very important activities. It serves the purpose in analyzing a variety of economic problems on the national scale. One such use of national income statistics is to make comparisons from year to year. When national income in real terms is compared, we get a clear picture of the conditions of the economy. It is a convenient tool to assess whether an economy is making any progress or not and at what rate it has grown. Such a growth rate (g) of the economy is an indicator of economic prosperity of the country. The growth rate can be computed as follows:
This is a ratio of difference in the real national income value of two subsequent years divided by base year real income. On multiplying this ratio by 100 we get the percentage change in the real national income which is the growth rate of the economy. In our earlier example we have,
The economy can be said to have grown by 20 percent over the two periods Y0 and Y1.
Comparison of national income and computation of real growth rate, though important, is not a satisfactory indicator. It is only an absolute measure and gives an idea about gross improvements in the country’s wealth. However, it does not explain ultimate improvement in the living standards of the population of the country. This is because while computing the growth rate we
have not related it to the size of the population. If over the same period, the size of the population has also increased from say N0 to N1, then the share of each citizen in the national income must have increased only by a smaller proportion. Such a share of every citizen in the national income is called per capita income (PC) which is obtained as ratio of real national income to the population.
Thus over the period Y0 to Y1 per capita income has increased by 5.71 (45.71 - 40). The percentage increase in the P.C. can be stated as:
Though the real national income has shown a growth rate of 20 percent, the per capita growth rate is only 14.27. This is because of the fact that increased national income has been shared by a greater number of people with an expansion of population (say from 40 to 42 in the example). Hence though the national income in real terms has increased at a larger pace, living standards of the people have improved at a slower pace. The population growth rate over this period is 5%.
The difference between growth rate of income (20%) and growth rate of per capita income (14.27%) is approximately equal to the same proportion as the population growth rate. Hence normally per capita growth rate is indicated as a difference between income and population (g - N) growth rates. The P.C. and its growth rate is a relative measure of comparing economic conditions of a society and is a power tool of analysis.
e) Construction of Index Number and CPI: Earlier we have computed the deflator and used it as a tool for measurement of the inflationary rise in prices. This is one example of an index number. There are a variety of index numbers or indices constructed and used for the purpose of comparing several quantitative changes as prices, money supply, wages, national income, population etc. Some of the examples of price indices are Wholesale, Retail, Standard of living etc. There are certain standard index numbers of which three are commonly used. These are Paasche’s, Laspeyre’s and Fisher’s index numbers. Of these, Sir Irving Fisher’s index number is foolproof and is completely unbiased.
f) Consumer Price Index (CPI) is a special type in price indices. It is considered as a standard or basic tool of comparison of the extent of and effect of changes in the price level. We will illustrate the method of construction of the CPI. In order that the value of the CPI should be representative and reliable several precautions have to be taken. The goods included in the construction of CPI must be properly selected and their weights should be accurately assigned. These goods and their qualities should form part of the regular consumption of an average man. Normally the goods included in CPI construction are food, clothing, fuel, transport, education, housing some other items. Again the data about the statistical information on these items is to be collected from average members of the society. Let us attempt construction of the CPI on these lines.
For convenience let’s limit our example only to three commodities. Then we have quantities of the three goods as consumed in the base year with their respective prices. Similarly we have current year quantities and prices. Let these be denoted as q0, P0 for base year and q1, P1 for current year as quantities and prices respectively. Then the value of the CPI can be computed as:
The symbol is a sign of summation. Therefore CPI is a ratio of sum of the quantity multiplied by the prices of the current year, divided by sum of the quantity multiplied by the prices of the base year. The ratio value is then multiplied by 100 to obtain the percentage change in the CPI value. The quantities are also known as weights.
CPI | ||||||
| Base Year | Current Year | |||||
| Goods | Quantities | Prices | Total Exp. | Quantities | Prices | Total Exp. |
| q0 | P0 | q0 ´ P0 | q1 | P1 | q1 ´ P1 | |
| A | 10 | 6 | 60 | 9 | 7 | 63 |
| B | 8 | 10 | 80 | 7 | 12 | 84 |
| C | 16 | 3 | 48 | 15 | 3.5 | 52.5 |
| åq0 P0 = 188 | åq1 P1 = 199.5 | |||||
The CPI value is therefore:
Therefore CPI value over this period has increased by 6.11 percent. The rise in the CPI is considered the rise in the price level or the rate of inflation. Note that base year expenditure value is equated to 100 therefore the CPI index value for the base year is 100.
It is a matter of both convenience and convention to assume base year value as 100. This enables us to compare with a similar value of any other year and to state the difference as a percentage change.
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