Page 155 - Special Topic Session (STS) - Volume 3

STS538 Rameshwar S.
national accounting deflation etc. The index is estimated as a weighted
average of elementary aggregate indices, preferably defined in terms of a
three-dimensional stratification of items, regions and types of outlets.
The scope of the index has two main dimensions: geographical and the
reference population. Many countries started with the CPI for the capital city
and later extended to other urban and rural regions and the national
combined index. By reference population we mean is it for low-income
families, middle-income households, industrial workers, agricultural workers,
expatriates, etc.
When CPI uses weights which reflect the composition of the aggregate
expenditures of the reference population, this is known as plutocratic. When
CPI provides equal importance to all households by averaging expenditure
proportions of the reference population instead of summing expenditure
amounts, this is known as democratic. Plutocratic weighting is more
appropriate if the index is used as a general measure of inflation or for national
accounts and other deflations. Sometimes the population data is used to
weight different regions (urban/rural) in the calculation of the overall index.
Thus the regional population shares when multiplied by regional average
expenditure may provide reasonable weights.
A Household Income & Expenditure Survey (HIES) or Household Budget
Survey (HBS) is the main source of data for weighting. Some developed
countries have annual surveys, some countries conduct every 5th or 10th year.
Small changes in weight have little effect on the index, so if an annual survey
is not possible due to resources, a five or ten-year frequency should be
maintained. The HIES data are also used by a wide range of public and private
organizations for economic analysis and planning purposes.
All weights need to be rescaled to sum to 100 or 1000. The selection of
items for the consumption basket is based on annual average consumption
expenditure proportion to that of the total, if it is above 1/10,000 or 1/1,000
from HIES data. The number of items in the basket are in the range 200¬500
depending upon the size of the country and the reference population.

3. Results
The Table 1 below provides some basic indicators to indicate that the six
countries were very diversified in terms of population, gross domestic product
(GDP) and inflation.

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