Consumer price Indices Indicate Changes in General Price Level overtime. Apart from their importance as abroad economic indicator price indices have several important uses. The cost of living index (Consumer price Index) is most Frequently used as precision instrument in the determination of public Policies. It is also used in wage negotiation and adjustment, at prices change, and in evaluation of price change, and in evaluation of price trend.
The first step in the preparation of the consumer index is the selection of the income groups for which the index will be calculated. The income groups were defined in terms of Government employees of Ls.1000 to 1500 in 1987, was taken to represent lower level. The incomes for intermediate level staff compared with current incomes of Ls.1500 to Ls.4000, and management level staff incomes, which were range Ls. 4000 to Ls.9000, represent higher income.
The construction of the Index Number is based on the idea of turning the individual prices at base & current date into price relatives from one date to another, and then calculating the average of the price relatives.
The average is represented by the arithmetic mean weighted by the Distribution of the Money
Aggregate concerned, over the individual items Priced.
The weighing system for the cost of living index was derived from the Consumption
Expenditure survey in 1979 - 1980. The items of private consumption were grouped up into
Nine homogeneous groups with regard to their nature and each group contains a number of sub
Groups. The commodity content of the cost of living index is based on the same classification.
The priced items are grouped up into nine major divisions, each containing a number of subs –
Prices for the items included in food & drink group were collected Three markets in each week from three market in each town, and simple average of these every week from prices was taken for each commodity. Prices for other items were collected each month from two markets in each town, and
two shops in each market.
The method used in the construction of the monthly index number is related to the laspeyres Formula of the price index and known as the weighted price relatives formula, the laspeyres price index may be expressed as follows:-
Index L = Sum ( P1 Q 0 ) = Sum ( P0 Q 0 × (P 1 / P 0 )
Sum ( P 0 Q 0 ) Sum ( P 0 Q 0 )
Where ( P Q ) represents the weight, or value of consumption of the Item in the base year. The second expression of the formula is most commonly used in the calculation of the index. It will also be used in the new index series. The formula can be expressed as follows :-
r r r
I st = ( P st W s / W s )
Where :-
I t :Is the price index of the current period (t) to the base period (s).
r r
I st / Ps
Is the price relative of commodity (r) which measures the ratio of the level of price of period (t) to that of period ( s ).
r
Ws
Is the weight assigned to commodity (r). The weighted of the price relatives are direct weights and may as well be assigned to commodity groups.
B