Construction of RPI
1 ) Selection of goods - it's nearly impossible to calculate the price changes of all the goods and services, so a basket of about several 100 goods are selected, these goods must be the goods that are used by an average family.
2 ) base year - this must be a normal economic year in which there are no political or economical imbalances. base year is taken as standard year with which rest of years prices are compared. price level in base year is represented by 100.
3 ) collection of data - statistical department of govt. collects info about the prices in the base year as well as current year (the year whose price level is supposed to be found) info is gathered from price-lists, newspapers, cooperative societys office, etc.
4 ) assigning weight - patterns of expenditure are different for different goods, ppl spend more on some goods and less on others. more weight shud be given to those goods that are being used relatively commonly.
weight= expenditure on the good/total expenditure
5 ) Index (prive relatives) are calculated by:-
INDEX = current year price/base year price X 100
6 ) Weighted Index is calculated:-
WI = weight X index
7 ) RPI = total weighted index/total weights
8 ) RATE OF INFLATION is calculated by takin % changes in current year average prices, i.e, RPI of current year to the base year average prices
Rate of inflation = (RPI (current) - RPI (last year))/RPI (last year)*100%
Hope that helped.
