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year 2000 the price of a kg of rice was Rs 10 and a piece of cloth was Rs 100. So the consumer had to spend a total sum of Rs 10 × 90 = Rs 900 on rice in 2000. Similarly, she spent Rs 100 × 5 = Rs 500 per year on cloth. Summation of the two items is, Rs 900 + Rs 500 = Rs 1,400. Now suppose the prices of a kg of rice and a piece of cloth has gone up to Rs 15 and Rs 120 in the year 2005. To buy the same quantity of rice and clothes the representative will have to spend Rs 1,350 and Rs 600 respectively (calculated in a similar way as before). Their sum will be, Rs 1,350 + Rs 600 = Rs 1,950. The 1,950 CPI therefore will be 1,400 × 100 = 139.29 (approximately). It is worth noting that many commodities have two sets of prices. One is the retail price which the consumer actually pays. The other is the wholesale price, the price at which goods are traded in bulk. These two may differ in value because of the margin kept by traders. Goods which are traded in bulk (such as raw materials or semi-finished goods) are not purchased by ordinary consumers. Like CPI, the index for wholesale prices is called Wholesale Price Index (WPI). In countries like USA it is referred to as Producer Price Index (PPI). Notice CPI (and analogously WPI) may differ from GDP deflator because 1. The goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. 2. CPI includes prices of goods consumed by the representative consumer,hence it includes prices of imported goods. GDP deflator does not include prices of imported goods. 3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator. 2.5 GDP AND W ELFARE 30 Can the GDP of a country be taken as an index of the welfare of the people of i m that country? If a person has more income he or she can buy more goods and o services and his or her material well-being improves. So it may seem reasonable e to treat his or her income level as his or her level of well-being. GDP is the sum c total of value of goods and services created within the geographical boundary of a a country in a particular year. It gets distributed among the people as incomes r (except for retained earnings). So we may be tempted to treat higher level of GDP c d of a country as an index of greater well-being of the people of that country (to t account for price changes, we may take the value of real GDP instead of nominal I GDP). But there are at least three reasons why this may not be correct. 1. Distribution of GDP – how uniform is it: If the GDP of the country is rising, thewelfaremaynotriseasaconsequence.ThisisbecausetheriseinGDPmay beconcentratedinthehandsofveryfewindividualsorfirms.Fortherest,the incomemayinfacthavefallen.Insuchacasethewelfareoftheentirecountry cannot be said to have increased. For example, suppose in year 2000, an imaginarycountryhad100individualseachearningRs10.ThereforetheGDP of the country was Rs 1,000 (by income method). In 2001, let us suppose the samecountryhad90individualsearningRs9each,andtherest10individual earning Rs 20 each. Suppose there had been no change in the prices of goods andservicesbetweenthesetwoperiods.TheGDPofthecountryintheyear2001 was 90 × (Rs 9) + 10 × (Rs 20) = Rs 810 + Rs 200 = Rs 1,010. Observe that Reprint 2026-27