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Measuring Inflation

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Measuring Inflation

There are two common methods of measuring inflation: (i) percentage change in price index numbers(PIN), and (ii) change in GNP deflator. The two methods of measuring inflation are discussed below.

Measuring inflation by PIN

The following formula is used for measuring the rate of inflation through the change in the PIN.

Rate of inflation = PINt = PINt-1 / PINt-1 x 100

Where PIN, in the price index number in the year selected for measuring inflation in the PINt-1 is the price index number in the preceding year.

The two widely used PIN s are wholesale price index (WPI), also called producer price index (PPI), and consumer price index (CPI). WPI is used measure the general rate of inflation and CPI is used to measure the change in the cost of living.

In order to illustrate the measurement of inflation, let us use price index number in India in the early1990s. The WPI (1999 – 2000 = 100) for all commodities increased from 134.6 in 2005 -06 to 141.9 in 2006-07. The rate of inflation between 2005-06 and 2006-07 can be obtained by using the above formula as follows.

Rate of inflation = 141.9 – 134.6 / 134.6 x 10 x 5.4 percent

Measuring inflation by GNP deflator

The GNP deflator is the ratio of nominal GNP to the real GNP of the same year, I.e.

GNP deflator = nominal GNP / real GNP

Where nominal GNP is GNP at current prices and real GNP is GNP at constant prices.

The GNP deflator for any year can be obtained by using this formula. Suppose we want to calculate India’s GNP deflator for the year 2005-06. India’s nominal GNP (GNP at current prices) in 2005 – 06 was $32, 76,000 billion and her real GNP (GNP at constant prices of 1999-2000) was $ 26, 13,000 billion. Now India’s GNP deflator for 2005-06 can be obtained as follows,

GNP deflator (2005-06) = 32, 76,000 / 26, 13,000 = 1, 2537

In terms of percentage, GNP deflator equals 1.2537 x 100 = 125.37 percent. It means that India’s nominal GNP in 2005-06 was 125.37 percent of her real GNP, or the nominal GNP was 12.54 percent higher than her real GNP in 2005-06.

The percentage change in GNP deflator between any two years gives a measure of inflation. For example the rate of inflation between 1990-91 and 1991-92 can be obtained as follows.

Rate of inflation = 258.892 – 225.569 / 225.569 x 100 = 14.77%

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