The index which measures the change in prices of goods and services purchased by specific class or group of people for a particular period of time is called consumer price index. Since the income level and living pattern of households differ therefore it is necessary to clearly specify the class of people and the locality where households reside. Consumer price index is also known as cost of living index and retail price index because it also measures the standard of living of a particular class of people and is a method to determines the real purchasing power of money.
For computation purpose we have two formulae depending upon the type of method used. These two types of methods used are given below.
The Aggregate Expenditure Method
If the weights are quantities consumed by a family in base year then Laspeyre’s index is constructed. This method of calculating consumer price index from Laspeyre’s index is called aggregate expenditure method.
Problem: Construct the cost of living index using aggregate expenditure method.
Family Budget method
If weights are the total amount spent on each commodity then Average-of-relatives index is constructed and the method is called family budget method.
Problem: Construct the cost of living index using family budget method.
In this case total amount spend on each commodity is taken as weights therefore average of relatives is constructed.