The Consumer Price Index and the Retail Price Index Essay

The Consumer Price Index and the Retail Price Index - Essay Example The sample of the population used in calculating consumer price index includes different wage earners but excludes those from the military and correctional institutions including jails (Mankiw 2011, 123). Retail price index is an inflationary measure that captures the change in the cost of living of certain categories of people. This index compares the percentage of money spent by the said people in buying different commodities over a certain period. It reflects the prices of certain items that are largely used on a daily basis including common household items, diesel, petrol, bus fare, rent, and electricity. These items are given weightage because they are used on almost a daily basis. Alcohol and tobacco are examples of other goods that are used in calculating retail price index but are given lesser weightage than the aforementioned items. Retail price index is calculated on a monthly and annual basis (Biggeri & Ferrari 2010, 114). Calculation of consumer price index starts by selecting a basket of goods and services which typical consumers spend their money on. The prices of these items at that particular time are determined. The cost of the selected basket of goods and services is calculated by multiplying the price of each item by its quantity in the basket and then adding these products. Consumer price index calculators then pick on a base year against which to compare prices of the selected basket of goods and services in each comparison year. The price of the fixed basket of goods and services in comparison years is divided with the price of the same basket in the base year and the quotient multiplied by a hundred to show the differences in the costs of living between those years (Diewert et al 2009, 72). The calculation of the retail price index involves choosing a base year in which the economy of a country is thought to have been stable and the year is given a hundred points. The items used by the class of people or