## Retail Price Index

The retail price index measures the change of average prices over a certain amount of time. The measurements are made by recording the essential goods and services people are expected to buy, putting them into an imaginary shopping basket called the "Basket of Goods".

A price index is shown as a single number which indicates the price change in a number of different goods. This is calculated by comparing the price of goods to the base year.

Inflation is the rise in the prices of goods and services in an economy over a period of time. When the general price level rises, goods and services become more expensive. A chief measure of price inflation is called the inflation rate, it is the annualized percentage change of general price index over a period of time.

Inflation's effects on an economy can be both positive and negative. One of the negative effects of inflation include a decrease in the real value of money. Furthermore, inflation also discourages saving and investments. On the other hand, some positive effects include encouraging investment in non-monetary capital projects and ensuring central banks can adjust nominal interest rates.

You can use the Inflation Calculator to calculate the inflation rate. It uses a price index to show you how the cost of goods and services has changed over time.

For example, you want to know what goods and services costing £23.60 in 1990 would have cost in 1997.

The price index for 1990 = 134.8

The price index for 1997 = 373.2

The Calculator increases the cost in 1990 by the change in prices between 1990 and 1997 with this formula:

Cost in 1997 = Cost in 1990 x ( 1997 price index / 1990 price index )

£65.33 = £23.60 x ( 373.2 / 134.8 )

Therefore, the future cost in 1997 of the same goods and services has risen to £65.33.

The price index is used to show inflation rates and how it effects customers. however there are still some disadvantages:

- The index does not 100% accurately show how price changes affect typical customers.

- The index compares the prices of the current year to the base year. However, if the results of the base year is especially low or high, the price index won't be as accurate.

- Some items are subjected to a lot of other variations: E.g. Food & Fuel

A price index is shown as a single number which indicates the price change in a number of different goods. This is calculated by comparing the price of goods to the base year.

**Inflation**Inflation is the rise in the prices of goods and services in an economy over a period of time. When the general price level rises, goods and services become more expensive. A chief measure of price inflation is called the inflation rate, it is the annualized percentage change of general price index over a period of time.

Inflation's effects on an economy can be both positive and negative. One of the negative effects of inflation include a decrease in the real value of money. Furthermore, inflation also discourages saving and investments. On the other hand, some positive effects include encouraging investment in non-monetary capital projects and ensuring central banks can adjust nominal interest rates.

**Calculating Inflation Rate**You can use the Inflation Calculator to calculate the inflation rate. It uses a price index to show you how the cost of goods and services has changed over time.

For example, you want to know what goods and services costing £23.60 in 1990 would have cost in 1997.

The price index for 1990 = 134.8

The price index for 1997 = 373.2

The Calculator increases the cost in 1990 by the change in prices between 1990 and 1997 with this formula:

Cost in 1997 = Cost in 1990 x ( 1997 price index / 1990 price index )

£65.33 = £23.60 x ( 373.2 / 134.8 )

Therefore, the future cost in 1997 of the same goods and services has risen to £65.33.

**The Disadvantages of Using a Price Index**The price index is used to show inflation rates and how it effects customers. however there are still some disadvantages:

- The index does not 100% accurately show how price changes affect typical customers.

- The index compares the prices of the current year to the base year. However, if the results of the base year is especially low or high, the price index won't be as accurate.

- Some items are subjected to a lot of other variations: E.g. Food & Fuel

*-Average prices are managed by using:*

- Retail price index (RPI)
- Consumer price index(CPI)

*-Measures changes in average prices over a year*

-goods and essentials were put in an imaginary basket, and measurements are then recorded

Once upon a time, a man called Kevin walk on the street of Potatoland. Kevin Works for the government, and is in charge of the finance of Potatoland. He measures the average price by creating an imaginary shopping basket that a typical Potatoland family contains. The basket contains milk, potato chips, potato cakes, and potato eggs. To calculate the average price, it start with the base year. For example, if the base year is given a figure of 100. Assume that the basket price is 10 percent higher, the price index will now be 110.

One day, a horrendous incident happened in Potatoland. Inflation occurred in Potatoland, inflation is a rise in price over a period of time. The average price will rise along with inflation. When inflation happened, the proportion of daily essentials will differ, for example, the needed for sugar is less then the needed of meat or beef. This is called weighting.

Another sunny day, Kevin decided to calculate the rate of inflation, so he opens up his IGCSE economics book and turned to page 142. In order to calculate the rate of inflation, Kevin started to calculate the average price changes. Kevin first collected the two kinds of data, which is the price data and the weights. Moreover, with this sets of data, he is able to construct a table showing different households on percentage spend and the weight of all the different category household essentials. Next, Kevin have to identify the price changes in each of the different categories. Suppose that a normal potato land family spends 60 percent of money on potato costumes, and the prices have increased by 25 precent, this will cause a big effect on them, since 60 percent of money is spend on potato costumes. After calculating the weighted price index, Kevin will divide the the amount by the total number of weights. The final answer will subtract the base year amount, finally, the result will be the rate of inflation.

-goods and essentials were put in an imaginary basket, and measurements are then recorded

Once upon a time, a man called Kevin walk on the street of Potatoland. Kevin Works for the government, and is in charge of the finance of Potatoland. He measures the average price by creating an imaginary shopping basket that a typical Potatoland family contains. The basket contains milk, potato chips, potato cakes, and potato eggs. To calculate the average price, it start with the base year. For example, if the base year is given a figure of 100. Assume that the basket price is 10 percent higher, the price index will now be 110.

One day, a horrendous incident happened in Potatoland. Inflation occurred in Potatoland, inflation is a rise in price over a period of time. The average price will rise along with inflation. When inflation happened, the proportion of daily essentials will differ, for example, the needed for sugar is less then the needed of meat or beef. This is called weighting.

Another sunny day, Kevin decided to calculate the rate of inflation, so he opens up his IGCSE economics book and turned to page 142. In order to calculate the rate of inflation, Kevin started to calculate the average price changes. Kevin first collected the two kinds of data, which is the price data and the weights. Moreover, with this sets of data, he is able to construct a table showing different households on percentage spend and the weight of all the different category household essentials. Next, Kevin have to identify the price changes in each of the different categories. Suppose that a normal potato land family spends 60 percent of money on potato costumes, and the prices have increased by 25 precent, this will cause a big effect on them, since 60 percent of money is spend on potato costumes. After calculating the weighted price index, Kevin will divide the the amount by the total number of weights. The final answer will subtract the base year amount, finally, the result will be the rate of inflation.