Explain the various steps in the construction of CPI. - Vidyadip

Question

Explain the various steps in the construction of $CPI$.

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Answer

The construction of consumer price index involves the following steps:

Decision about the class of people: First of all, it should be made clear for which class of consumers, the index number is to be constructed, i.e., whether the index is related to industrial workers, agricultural workers, urban non-manual workers etc. At the same time, the scope of the index should also be defined.
Conducting a family budget survey: A family budget enquiry is to be conducted from a sample of families in order to collect the data about the items of income-expenditure, quantities of commodities etc. Items of consumption are mainly divided into five categories, i.e., food, clothing, fuel and lighting, house rent and miscellaneous.
Price quotations: After selecting the commodities, their retail prices are obtained Retail prices of the selected commodities are collected from the reliable sources and from those places where the most of the consumers buy their goods.
To decide weight: To indicate the relative importance of the items of consumption, weights are assigned to them. Weights can be given in two ways, i.e., quantity weights (either $q_0$ or $q_1$) and weights in the proportion of expenditure made on each commodity in the base year.
Methods of construction: There are two methods of constructing consumer price index. These are:

Aggregate Expenditure Methode:

$\text{P}_{01}=\frac{\Sigma\text{p}_1\text{q}_0}{\Sigma\text{p}_0\text{q}_0}\times100.$

Family Budget Methode:

$\text{P}_{01}=\frac{\Sigma\text{RW}}{\Sigma\text{W}}$
Where $\text{R}=\frac{\text{p}_1}{\text{p}_0}\times100$
W = Weight

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