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Consumer Price Index

The CPI is a valuable tool that is used by the government to monitor on a few aspects of the economy so as to maintain and keep a stable economy and the cost of living. The government makes use of what is commonly referred to as a basket of goods. The basket contains products that are used on daily basis by consumers living in the urban areas. They also monitor the same basket in the countryside. The prices at the time are compared to what was there before. This gives a clear indication of the spending ability of the consumers. The consumer price index will also look into the spending trends of the consumers in comparison to their income.

Uses of the Consumer Price Index

It has been a paramount tool in the economy of the United States. Many countries have also tried to use the same standards in controlling the economy in their countries. The primary importance of the CPI is that it is used to indicate the direction of the economy. By this, it indicates the level of inflation. If the level of CPI is very high, then the inflation is very high. This will also show the direction towards which the economy is taking after the government has made into effect some policies. The government will use the CPI to create policies dealing with money and enumerations. CPI is also used a tool to regulate the dollar values. The income levels will be calculated in dollars and will be set depending on the consumer price index. It will also be used to adjust the taxes. This is important to ensure that people do not pay more tax because of inflation and neither do they evade taxes when the inflation is low. The consumer price index will also be used to show the deflator of the economy series. It shows changes in the level of the purchasing power of the dollar and make sure that people are remunerated at that rate.

Limitations of the CPI

The CPI method has been adopted by the United States and other developed countries. It, however, does not give the correct indication of the inflation and the cost of living. The weighted mean will always differ depending on the class of goods in the basket. It is also very difficult for the quality of the products in the basket to be established. Some new goods are always included in the basket. This may not give the correct indication as they have not penetrated the market yet.

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