SEMESTER - II
1. Q.2. What
is inflation and how inflation is measured?
ANS:
A sustained rise in the
general price level over time is known as inflation. Conversely, a sustained
fall in the general price level would be known as deflation. Inflation is
measured in terms of a price index. For instance, in India, we have the
wholesale price index (WPI) and the consumer price index (CPI). The Price Index
is based on a basket of goods and services. Within a given basket, the prices
of some goods and services may rise or fall. However, when there is a net
increase the price of the basket, it is called inflation.
Inflation is a rate of change in the price level. The rate
of change is measured with reference to the base year so that a longterm
perspective is obtained with regard to price rise. For all practical purposes,
inflation rate is measured on yearly basis. However, in recent years, the
inflation rate is also measured on monthly and weekly basis. The rate of
inflation can be measured as: P = [(P1 - P0) /P0] X 100. For example,
the price index based on the Wholesale Prices in India for the year 2015-16 was
122.06 and in 2016-17, it was 126.19. The rate of inflation for the year 2016-17
was 3.38 per cent. Inflation rate measured based on wholesale price index (WPI)
for the period 2015-16 to 2019-20 in India is given in Table 1.3.
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