Indian Economy · Topic 7 of 20
Measuring price changes and the business cycle
The Basics
An index number shows how much a variable has changed. It compares the variable to a chosen base period. It does not give an absolute value. It gives a relative value. The base period is usually fixed at 100.
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An index number for many goods needs a method. We cannot just average prices. Goods differ in price units. They also differ in importance to buyers.
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The Consumer Price Index (CPI) measures price changes for goods and services households buy. It uses the weighted index number method. Its basket is the consumer's basket, not a producer's or wholesaler's basket.
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WPI measures prices at the wholesale level. These are prices before goods reach shops.
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The Index of Industrial Production (IIP) is a volume index. A volume index measures quantity, not price. It shows how much factories produce. It compares output to a base year. In the base year, the index is 100.
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India's Housing Price Index is called NHB Residex.
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A benchmark index shows how stock prices move.
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Inflation means a sustained rise in general prices. The word "general" matters here. If only onion prices rise, that is not inflation. Inflation happens only when most prices rise together, over time.
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Inflation can be grouped by its cause, not just its size. Prices can rise due to demand, cost, or supply problems. These are called demand-pull, cost-push, and structural inflation.
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Inflation means prices of goods and services keep rising over time. The simplest cause is this: too much money chases too few goods.
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An economy does not grow at a steady pace. It moves up and down between good times and bad times. This repeated swinging is called the business cycle, or trade cycle.
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Controlling inflation means using government and Reserve Bank of India (RBI) tools. These tools slow down rising prices.
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