It is important to understand the basic concept of terms used in Economics. This will be helpful to understand the ideas while reading an article or a current affair or newspaper.

Wholesale Price Index (WPI) and Consumer Price Index (CPI)

A price index is a measure of the average level of prices that means that it does not show the exact price rise or fall of a single good in general. A price index is a weighted average of the prices of a number of goods and services.

Consumer Price Index (CPI) Percentage change in the weighted average price level. We take the prices of a given basket of consumption goods.

Wholesale Price Index (WPI) Percentage change in the weighted average price level. We take the prices of a given basket of goods which is traded in bulk.

Inflation and Deflation

When the general level of prices is increasing over a period of time this is inflation. Also termed a rise in inflation.

When the general level of prices is falling over a period of time this is deflation. Also known as disinflation or fall in inflation.

How is Inflation Calculated

The rate of inflation is measured on the basis of Wholesale Price Index (WPI) and Consumer Price Index (CPI).

Rate of inflation of particular year x = Price level particular (year x) –Price level particular (year x-1) / Price level particular (year x-1)×100