Page 96 - DMGT401Business Environment

Unit 3: Economic Environment of Business

2. Consumer Price Indices. Notes
3. Wholesale Price Index.
1. GDP Deflator: It is the broadest measure of the price level. Gross Domestic Product (GDP)
deflator is the index of the average price for the goods and services produced in the
economy. It includes the price of all finished goods. In other words, it doesn't include that
means, it don't include intermediate goods and raw materials. It ignores the prices of
imported goods, which enters the consumption basket and/or to the list of inputs in
production. The GDP deflator is based on calculations of the Gross Domestic Product-it is
based on the ratio of the total amount of money spent on GDP (nominal GDP) to the
inflation-corrected measure of GDP (constant-price or 'real' GDP).

2. Consumer Price Indices (CPI): The Consumer Price Indices (CPI) measure the price of a
selection of goods purchased by a 'typical consumer'. A consumer price index refers to the
index of the goods and services contained in the consumption basket of the relevant group
of consumers. It excludes the prices of capital goods (plant and equipments), raw materials
and intermediate goods, and includes the prices of services as well as of imported goods.
Because consumption pattern of families varies with their profession, place of living etc.,
there can be many CPIs. In India we have three such CPIs:
(a) CPI for Industrial Workers (CPI-IW).
(b) CPI for Urban Non-manual Employees (CPI-UNME).
(c) CPI for agriculture labourers (CPI-AL).

In many countries, annualised percentage changes in these indices are the most commonly
reported inflation figure. These measures are often used in wage and salary negotiations,
since employees wish to have nominal pay raises that equal or exceed the rate of increase
of the CPI. Sometimes, labour contracts include cost of living escalators, or adjustments
that imply nominal pay raises automatically occur due to CPI increases, usually at a
slower rate than actual inflation (and after inflation has occurred).
3. Whole Price Index: It measures the change in price of a selection of goods at wholesale (i.e.,
typically prior to sales taxes). It includes the prices of raw materials and semi-finished
goods, as well as of imported tangible goods, besides the prices of tangible goods included
in the GDP, if they are transacted at the wholesale level. It excludes the prices of services.

3.5.4 Impact of Inflation

Inflation influences and touches the life of every individual and corporate entity. Hence, Inflation
influences the decisions affects our lives in the following ways:

1. Indirect Tax: Inflation is considered the cruelest tax. The government can increase this
through its right to create money, especially through seigniorage. When the government
finances its deficit by issuing money, which the public adds to its holdings of nominal
balances, to maintain the real value of money balances constant, we say that the government
is financing itself through the inflation tax. The government can thus spend more resources,
forcing people to spend lesser, just as if the government had raised taxes to finance extra
spending.
2. Shoe Leather Costs: Inflation increases the cost of holding of currency as well as opportunity
cost. That is, if people keep the money with themselves, their purchasing power will
decrease because of inflation. People will tend to hold less cash, and will try to keep them
in banks or will try to invest in other interest yielding instruments during times of
inflation. This imposes real costs.

LOVELY PROFESSIONAL UNIVERSITY 89