What is Consumer Price Index (CPI)? Definition, Calculation & Exam MCQs
The Consumer Price Index (CPI) is an essential economic indicator that measures changes in the average prices consumers pay for a basket of goods and services over time. This topic is crucial for school and competitive exam preparation, as well as for understanding inflation and cost of living in daily business and personal life.
| Index Type | Measures | Coverage | Published By | Base Year (India) |
|---|---|---|---|---|
| Consumer Price Index (CPI) | Average prices retail consumers pay | Goods & services (food, housing, health, education, etc.) | Ministry of Statistics and Programme Implementation | 2012 |
| Wholesale Price Index (WPI) | Average prices at wholesale level | Goods only (no services) | Ministry of Commerce and Industry | 2011–2012 |
What is Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the average change in prices paid by households for selected goods and services over time. It is a primary tool to track inflation, showing how the cost of living changes for consumers. Competitive and school exams frequently test questions based on CPI due to its significance in the Indian economy.
Significance and Calculation of Consumer Price Index (CPI)
CPI is important because it reflects real-life expenses for families and individuals. It helps in adjusting salaries, pensions, and government policies. The CPI is calculated by comparing the cost of a fixed basket of goods and services in the current year to the cost in the base year.
Formula for CPI Calculation
CPI = (Cost of basket in current year / Cost of basket in base year) × 100. For example, if the basket cost is ₹1,200 in 2024, and ₹1,000 in 2012 (base year), then CPI = (1200/1000) × 100 = 120.
Exam-Focused MCQs on Consumer Price Index (CPI)
- Which index measures the price change of goods and services paid by consumers in India?
A) Wholesale Price Index
B) Consumer Price Index
C) Producer Price Index
D) GDP Deflator
Answer: B - Who releases the monthly Consumer Price Index (CPI) data in India?
A) Ministry of Finance
B) Ministry of Statistics and Programme Implementation
C) Ministry of Commerce and Industry
D) Reserve Bank of India
Answer: B - What is the current base year for CPI in India?
A) 2001
B) 2004
C) 2012
D) 2015
Answer: C - CPI includes which of the following for its calculation?
A) Only goods
B) Only services
C) Both goods and services
D) None of the above
Answer: C - What does a rising CPI indicate in the economy?
A) Economic stability
B) Deflation
C) Inflation
D) GDP growth
Answer: C - How often is CPI data published in India?
A) Daily
B) Weekly
C) Monthly
D) Yearly
Answer: C - A student spends on tuition, internet, groceries, and rent. Which index captures this?
A) Producer Price Index
B) Wholesale Price Index
C) Consumer Price Index
D) Stock Market Index
Answer: C - Which sector has the highest weightage in the Indian CPI basket?
A) Housing
B) Food and beverages
C) Education
D) Clothing
Answer: B - CPI is most commonly used to:
A) Set export prices
B) Adjust employee salaries and pension
C) Set company profit margins
D) Calculate imports
Answer: B - If the CPI moves from 100 to 110 in a year, what is the inflation rate?
A) 5%
B) 10%
C) 15%
D) 20%
Answer: B
Explanation: (110-100)/100 × 100 = 10%
Consumer Price Index (CPI) vs Wholesale Price Index (WPI)
| Feature | CPI | WPI |
|---|---|---|
| Coverage | Goods and services | Goods only (no services) |
| Focus | Retail (consumer) level | Wholesale (bulk) level |
| Publishing Ministry | Ministry of Statistics and Programme Implementation | Ministry of Commerce and Industry |
| Use | Inflation for households, wage indexation, policy | Business trends, manufacturing sector |
| Current Base Year (India) | 2012 | 2011–2012 |
Understanding this distinction helps prevent errors in exams, especially in questions about inflation measurement and retail vs wholesale prices. For further study, see Difference between Wholesale Price Index and Consumer Price Index.
Importance of Consumer Price Index (CPI) in Exams and Economy
- CPI questions frequently appear in board, UPSC, and SSC exams.
- Helps track inflation and its impact on daily living costs.
- Essential for adjusting salaries, contracts, and government benefits.
- Guides monetary policy decisions and welfare planning.
- Acts as a key indicator for economic analysis and national income measurement. Study National Income and Methods of Measuring National Income to understand broader context.
How to Use CPI Knowledge in Exams and Business
Students should practice CPI MCQs and understand its calculation to excel in school and competitive exams. In business, knowing the CPI aids in planning budgets and forecasting costs. For deeper understanding, refer to Meaning and Causes of Inflation and Index Numbers.
Real-World Example of CPI Use
Suppose the government announces a 7% rise in CPI this year. Employers may raise salaries or allowances to offset the increased cost of living. Students and exam aspirants should learn to interpret such examples for short and long-answer questions. Vedantu regularly updates such examples for Commerce learning.
Further Learning and Practice
- Practice more MCQs from Vedantu’s commerce pages for a variety of exam patterns.
- Study Features of Perfect Competition to understand price dynamics in different markets.
- Connect CPI to Government Deficit and GDP and Welfare topics.
In summary, the Consumer Price Index (CPI) is a vital economic tool for measuring inflation and living costs. Mastery of its calculation, significance, and comparison with WPI will help students in exams, competitions, and real-world economic understanding. Vedantu provides clear explanations, updated MCQs, and practical examples for all Commerce topics.
FAQs on Consumer Price Index (CPI) MCQs: Questions, Answers & Concept
1. What does the Consumer Price Index (CPI) calculate in MCQ?
The Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services. It's a key indicator of inflation.
2. What is included in the consumer price index (CPI)?
The CPI includes a wide range of goods and services commonly purchased by urban consumers. This includes food, housing, transportation, clothing, medical care, education, and entertainment. The specific items and their weighting are regularly reviewed to reflect changing consumption patterns.
3. What does a consumer price index measure changes in MCQ?
The Consumer Price Index (CPI) measures changes in the average prices paid by consumers for a basket of goods and services over time. This helps track inflation and cost of living changes.
4. What does the consumer price index (CPI) calculate?
The CPI calculates the percentage change in the average prices of a basket of goods and services consumed by households. It's used to track inflation and understand changes in purchasing power.
5. What is the base year of the consumer price index (CPI) in India?
The base year for the CPI in India is currently 2012. This means price changes are calculated relative to the prices in 2012.
6. Who issues the data of the consumer price index (CPI)?
In India, the Ministry of Statistics and Programme Implementation releases the CPI data. This data is crucial for policymakers and economists.
7. How often is the data of the consumer price index published?
CPI data in India is typically published monthly. This frequent release provides timely insights into inflation trends.
8. What is the consumer price index (CPI) and how is it calculated?
The Consumer Price Index (CPI) measures the average change in prices paid by urban consumers for a basket of goods and services. The calculation involves weighting each item based on its relative importance in consumer spending, tracking price changes over time, and expressing the changes as an index.
9. Why is CPI a better indicator for retail inflation than WPI?
The CPI is generally considered a better measure of retail inflation because it directly reflects prices paid by consumers for goods and services they actually purchase, whereas the Wholesale Price Index (WPI) tracks prices at the wholesale level. CPI gives a more accurate picture of the impact of price changes on household budgets.
10. What role does CPI play in policy-making?
CPI data is crucial for policymakers. It informs decisions related to monetary policy (e.g., interest rate adjustments), wage negotiations, and social welfare programs. Understanding CPI trends helps governments manage inflation and its effects on the economy.
11. How does changing the CPI base year affect inflation rates?
Changing the CPI base year can affect reported inflation rates. A new base year reflects updated consumption patterns and current price levels, potentially leading to recalculated inflation figures compared to the old base year.
12. Mcq on consumer price index cpi with answers
MCQs on CPI often test understanding of its definition, calculation, components, and uses in measuring inflation and cost of living. Answers should demonstrate knowledge of how CPI differs from other price indices like the WPI.
13. Mcq on consumer price index cpi pdf
Many online resources offer CPI MCQ PDFs for exam preparation. These PDFs typically include questions and answers to help students practice and assess their understanding of the Consumer Price Index.
