“Purchasing Power and Consumer Price Index”

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

  Watch our Videos on YouTube


> Should you find this article and video useful share so you can help your friends too. Click the like button and the subscribe button to our YouTube channel  so in the future, you can be notified when we upload more useful free educational videos to watch.

<Last updated 13.04.2020>

Dear reader,

Hi! If you are interested in Economics, I’ve prepared the below to help your understanding about money and cost. You should take a look at this short article in which I discuss what is Purchasing Power of Money and how we measure the cost of living.

Money has purchasing value: It is the power that money has, to be traded/exchanged with other goods and services. The quantity of goods and services that an amount of money can buy at a specific point in time. If prices of goods and services rise, it means that the same amount of money can buy less amount of those goods and services. So there is a negative relationship between prices and purchasing power.

A way to measure the purchasing power of money, or the general level of prices, is by using an economic indicator called Consumer price index (CPI). This is also a measure of the cost of living, and by comparing the index, period by period, we can have a measure/metric of the changes in the prices of goods and services through time purchased from the “average” household (that represents the household population). We compare usually the current year with a year in the past, the base year.

How it is calculated:

a) Define consumer basket of goods and services: a sample of goods and services purchased by a representative household. Prices are recorded and adjusted depending on the population. These goods and services are categorized based on Eurostat (the statistical office of the European Union, responsible for publishing high-quality Europe-wide statistics and indicators that enable comparisons between countries and regions) and data are collected from contacting a survey:

Consumer price index (CPI) is updated from time to time to reflect people’s preferences. If people spend a big part of their income for some categories of goods and services, these have to be included in this basket of the representative consumer.

How do we calculate  the CPI exactly? Here is an example:

Consumer price index (CPI) Calculation:

Base year > 2005 , CPI 2005 = 100    CPI 2006 = (10,600 / 10,000) x 100 = 106          CPI change 2005-2006 = (106 – 100)/100 x 100 = 6%            CPI change 2006-2007 = (113 – 100/100 x 100 = 13%

What are the benefits of calculating the CPI and have these data and information available?

> They are used for calculating the Inflation Rate, the % increase in prices, period by period, and thus the increase in the cost of living.

> For calculating automated CPI Adjustment.

> To perform adjusting, for the effects of inflation, to other economic indicators such us the GDP that provide us with useful information regarding the performance of the economy.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

References:
Ιωάννου-Σεργίου Μ., Μάτση Μ., Σάββα Ν., Σταύρου-Παπαδοπούλου Λ., Οικονομικά Α’ Λυκείου, Α΄ Έκδοση 2016. Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Β’ Λυκείου, Κύπρος, Α΄ Έκδοση 2016.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Γ’ Λυκείου, Κύπρος, Α΄ Έκδοση 2017.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Besanko, David Braeutigam, Ronald R. Gibbs, Michael, 2011, Microeconomics, Hoboken: John Wiley, 4th ed,
International student version
Frank, Robert H., 2010, Microeconomics and Behavior, New York: McGraw-Hill Irwin, 8th ed.
Estrin, Saul Laidler, David E. W. Dietrich, Michael ., 2008, Microeconomics, Harlow: FT/ Prentice Hall, 5th ed.

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.

© HCPro Human Capital Professional Education 2018-2020 | All Rights Reserved. HCPro Human Capital Professional Education is a tradename of COME WITH ME EDUCATION LTD - Company Registration No. HE 390680.

Log in with your credentials

Forgot your details?