Thesis for Graduating Paper - Essay Example

Thesis for graduating The Consumer Price Index, abbreviated as CPI, plays a key role in macroeconomics. It indicates how the economy of a particular country of a group of consumers, change with time. It also helps in knowing the magnitude of inflation in the economy. It signifies the relationship between prices of goods and services and the quantity. In fact, many people refer to it as inflation, which bases on the fact that, if inflation increases by a particular percentage, the index will also increase by the same amount, hence the two are directly related.

This paper seeks to evaluate the consumer price index by discussing how it is calculated and its implications. To calculate the consumer price index, one needs to identify a particular sample of goods and services that are common to the market. This group of commodities is usually referred to as ‘‘a shopping basket’ by Economists. The basket contains goods and services in the market that consumers use frequently. They are commodities which undoubtedly empties the pockets of the consumers regardless their social differences.

For one to come up with an accurate index, that gives the real picture on the ground, he or she has to choose the basket so wisely. However, in most of the countries, the consumer price index is calculated every month by a group of experts under the government of that country. Although what is contained in the basket remains intact, the price of the basket varies with time. This is because the price of each commodity in the basket changes depending on the market forces. For instance, a basket may contain onions, tomatoes and cabbages, which in the previous year coasted one, two and three dollars respectively.

This year, due to limited supply of onions, the price increased from one dollar to two, making the price of the basket change from six dollars to seven but still the commodities in the basket are still the same (Branson 108). This differences that arise due to differences in the prices of commodities in different areas and sectors of a country is what makes economists do a lot of research to come up with a common price of common commodities in order to calculate the index. This brings us to the point that there are commodities which are included in the basket while others are not included.

The question that one may ask is, why should we discriminate some commodities over the other? Working with all the commodities will consume a lot of time, and as economists’ time is a resource that is scarce, our work is to ensure that the limited resources are allocated accordingly to maximize utility and minimize cost. If using a sample of the commodities can give the exact results as when, all the commodities are used; it is more economical to select the sample. Secondly, which is the main reason as to why research has to be done on selecting the items in the basket is that, people are dynamic in the way they spend.

The types of the commodity being consumed across all the consumers may differ significantly hence need to find common items among the consumers in order to get the real reflection on the ground (Branson 110). Having discussed the reasons why we should select the items to be included in the shopping basket, it is vital to mention the items that are included and the ones that are not. Goods to included in the shopping basket must be consumer goods. These are goods that are readily consumed and available across all market.

The goods must also be consumed by the majority in order to show the true image of the economy. However, non consumer goods are not considered to be included in the basket. Non consumer goods such as investments include; life insurance, pensions and savings. This goods and services are made for future purposes. They are not consumed in the current year hence including it in the basket will distort the economy. Loan transactions do not have a direct impact on the consumers neither do they purchase anything, adding them in the basket will increase the index number thus not giving the true image.

Other goods and services that should not be included in the basket for calculating the CPI are second hand purchases, consumption from own production and expenditure on gambling. After identifying the items in the basket, the index is then calculated. Most of the time, the previous year, is normally used as the base year. A base year is the year to which the current year is compared to. Other countries had chosen a year, when the prices of commodities were stable, as the base year. Each commodity in the basket is given a weight which reflects the spending made on the commodity in comparison with the total spending.

The total weight of the basket is then divided by the weight of the same basket in the base year to get the consumer price index. The reason as to why the commodities are weighted together is to ensure that the index reflects the importance of various items in the average basket and the amounts spent on each in different parts of the country. Conclusion Consumer Price Index is calculated at any time depending on the decision of a country. However, most countries have a monthly calculation of the index done by an organization within the government.

Investors and businessmen depend on the index to make their decisions on where to invest or where to carry out their business. The consumer price index is used by many people for different reasons. Both the public and the private sector use the index to run their issue. Non governmental organizations also use the index to plan their activities. Work cited: Branson, Williams. Fundamentals of Macroeconomics. New York, McGraw Hill. 2010. Print.