Construction of a Consumer Price Index

The following are the steps in constructing a consumer price index:

(1)    Decisions about the class of people for whom the index is meant. It is absolutely essential to decide clearly the class of people for whom the index is meant, i.e., whether it relates to industrial workers, teachers, officers, etc. The scope of the index must be clearly defined. For example, when we talk to teachers, we are referring to primary teachers, middle class teachers, etc., or to all the teachers taken together. Along with the class of people it is also necessary to decide the geographical are covered by the index. Thus in the example taken above it is to be decided whether all the teachers living in Delhi are to be included or those living in a particular locality of Delhi.

(2)    Conducting family budge enquiry. Once the scope of the index is clearly defined the next step is to conduct a family enquiry covering the population group for whom the index is to be designed. The object of conducting a family budget enquiry is to determine the amount that an average family or the group included in the index spends on different items of consumption. While conducting such an enquiry, therefore, the quantities of commodities consumed and their prices are taken into account. The consumption pattern can thus be easily ascertained. It is necessary that the family budget enquiry amongst the class of people to whom the index series is applicable should be conducted during the base period.

(3)    Obtaining price quotations. The collection of retail price is a very important and, at the same time, very tedious and difficult task because such price may vary from place to place, shop to shop and person to person. Price quotations should be obtained from the localities in which the class of people concerned reside or from where they usually make their purchases. Some of the principles recommended to be observed in the collection of retail price data required for purposes of construction of cost of living indices are described below:

(a)    The retail prices should relate to a fixed list items and for each item, the quality should be fixed by means of suitable specification.

(b)    Retail prices should be those actually charged from consumers from consumers.

(c)    Discount should be taken into account if it is given to all customers.

(d)    In a period of price control or rationing, where illegal prices are charged openly, such prices should be taken into account along with the controlled prices.

The most difficult problem in practice is to follow principle (a), i.e., the problem of keeping the weights assigned and qualities of the basket of goods and services constant with a view to ensuring that only the effect of price change is measured. To conform to uniform qualities, the accepted method is to draw up detailed descriptions or specifications of the items priced for the use of persons furnishing or collecting the price quotations.

For more help in Construction of a Consumer Price Index click the button below to submit your homework assignment