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Though the real national income has shown a growth rate of 20 percent, the per capita growth rate is only 14.27. This is because of the fact that increased national income has been shared by a greater number of people with an expansion of population (say from 40 to 42 in the example). Hence though the national income in real terms has increased at a larger pace, living standards of the people have improved at a slower pace. The population growth rate over this period is 5%.
The difference between growth rate of income (20%) and growth rate of per capita income (14.27%) is approximately equal to the same proportion as the population growth rate. Hence normally per capita growth rate is indicated as a difference between income and population (g - N) growth rates. The P.C. and its growth rate is a relative measure of comparing economic conditions of a society and is a power tool of analysis.
e) Construction of Index Number and CPI: Earlier we have computed the deflator and used it as a tool for measurement of the inflationary rise in prices. This is one example of an index number. There are a variety of index numbers or indices constructed and used for the purpose of comparing several quantitative changes as prices, money supply, wages, national income, population etc. Some of the examples of price indices are Wholesale, Retail, Standard of living etc. There are certain standard index numbers of which three are commonly used. These are Paasche’s, Laspeyre’s and Fisher’s index numbers. Of these, Sir Irving Fisher’s index number is foolproof and is completely unbiased.
f) Consumer Price Index (CPI) is a special type in price indices. It is considered as a standard or basic tool of comparison of the extent of and effect of changes in the price level. We will illustrate the method of construction of the CPI. In order that the value of the CPI should be representative and reliable several precautions have to be taken. The goods included in the construction of CPI must be properly selected and their weights should be accurately assigned. These goods and their qualities should form part of the regular consumption of an average man. Normally the goods included in CPI construction are food, clothing, fuel, transport, education, housing some other items. Again the data about the statistical information on these items is to be collected from average members of the society. Let us attempt construction of the CPI on these lines.
For convenience let’s limit our example only to three commodities. Then we have quantities of the three goods as consumed in the base year with their respective prices. Similarly we have current year quantities and prices. Let these be denoted as q0, P0 for base year and q1, P1 for current year as quantities and prices respectively. Then the value of the CPI can be computed as:
The symbol is a sign of summation. Therefore CPI is a ratio of sum of the quantity multiplied by the prices of the current year, divided by sum of the quantity multiplied by the prices of the base year. The ratio value is then multiplied by 100 to obtain the percentage change in the CPI value. The quantities are also known as weights.
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