Explain the importance of Consumer Price Index. - Vidyadip

Question

Explain the importance of Consumer Price Index.

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Answer

The Consumer Price Index (CPI) is one of the special type of price index as:

It is useful in wage negotiations. The government grants additional dearness allowance to its employees on the basis of increase in CPI from time to time.
It is helpful in the formation of wage policy, income policy, price policy, taxation and general economic policy.
It is used to calculate the purchasing power of money.
It is used to calculate the real wages or real income of a particular group. The formula used is:

Real Wages $=\frac{\text{Money wages}}{\text{Cost of living index number}}\times100$

It is a good indicator of the movement of retail prices of most of essential commodities of daily use.

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