Question 1 · 10 marks · 241 words written
Differentiate between Consumer Price Index (CPI) and Wholesale Price Index (WPI). Do you think that CPI is a better measure of inflation as compared to WPI? Substantiate. (Answer in 150 words) 10 Marks.
Opening
There are myriad ways to measure the level of inflation and the purchasing power of the consumers - some are Consumer Price Index [CPI] and Wholesale Price Index [WPI].
Body · points and prose
Different between CPI and WPI
| CPI | WPI |
|---|---|
| 1) It measures the prices based on the consumer's side | 1) It measures the prices based on the producer's or wholesaler's side |
| 2) Concerned about the demand side | 2) Concerned about the supply side |
| 3) RBI uses it to measure inflation since 2014. | 3) This does not give entire picture so not used to measure inflation |
| 4) Includes good & services both. | 4) Includes only goods. |
| 5) Retailer's perspective is considered. | 5) Wholesaler's perspective is considered. |
CPI is a better measure to calculate inflation than WPI because :-
(1). CPI has comprehensive coverage as it includes goods & services both. (2). It picks up the bargaining capacity of the lowest rung of the economy i.e., end users. (3). Allows easier calculation of inflation. (4). Reduces the cascading effect seen during inflation. (5). Effective decisions can be taken by RBI through monetary policy if CPI considered.
Concerns → It excludes bulk manufacturing → The concerned GDP - GVA gap cannot be decreased through it.
Close · a way forward
Thus CPI & WPI both being apt indicators can be reformed to capture the real inflation surfacing the economy.