Cambridge International as and a level Economics Ebook

Measurement of inflation
A country’s price level indicates how much it costs to live 
in that country. A rise in the price level means that the 
cost of living has increased. To assess changes in the cost 
of living, governments construct consumer price indices. 
Th
ere are a number of stages in doing this:
■
 
Selecting a base year: This is usually a relatively standard 
year in which nothing unusual has occurred. It is 
given a value of 100. The base year is changed on a 
regular basis.
■
 
Carrying out a survey to find people’s spending patterns: 
A sample of the population’s households are asked to 
keep a record of what they buy. The products purchased 
are placed into categories such as food and clothing and 
footwear.
■
 
Attaching weights to the diff erent categories: Weights 
are based on the proportion of total expenditure spent 
on the diff erent categories. For instance, if on average 
households spend $500 of their total expenditure 
of $2,000 on food, the category will be given a weight 
of ¼ or 25%.
■
 
Finding out price changes: Prices in a range of retail outlets 
and from a number of other sources such as gas companies 
and train companies are recorded.
■
 
Multiplying weights by price changes: The total will give the 
change in the 
consumer price index
.
Table 4.1
 shows an adaption of the consumer price index 
for Mauritius for the period December 2011 to December 
2012. It stood at 130.4 at the start of this period; by 
December 2012 it was 134.38, a net increase of 3.05%.
Consumer price index: 
an index that shows the average 
change in the prices of a representative basket of products 
purchased by households.
KEY TERM