Expalin the inflation, the CPI index and owners\' equivalent rent with example. And how the CPI index is determined with solved example?
In general terms, inflation represents the decrease of purchasing power concerning a currency of a nation and it is generally represented as percentage. The term ‘inflation’ is related to economics, and is defined as the quantitative measure concerning the rate of the increase of the average level of price for a basket of goods or for a service in an economy with time. In layman terms, with passing time the price for a certain good or service is rising and on the other hand the purchasing power for a currency is declining.
Example- The average inflation rate in India from 2012 to 2016 was recorded as 7.70%.
CPI stands for Consumer Price Index. CPI is used to measure the changes in the level of price for a consumer good or a service, which is being purchased by a household. These goods and services include transportation cost, food prices, medical care and many more. The CPI is calculated with the help of the difference of changes in the prices for a basket of goods and by taking out an average value from that. The CPI provides with very useful statistics to identify the inflation period and deflation period. The CPI is divided into two types, the CPI-W, which determines the Consumer Price Index for Urban Wage Earners and Clerical Workers, and the CPI-U determines the Consumer Price Index for Urban Consumers.
The formula to calculate the Consumer Price Index is:
Owners’ Equivalent Rent
The short form of Owners’ Equivalent Rent is OER. The OER is the amount of the rent that has to be paid, for a rental property, in order to substitute the current owning house. The Owners’ Equivalent Rent is also known as rental equivalent. Owners’ Equivalent Rent provides an instrument for the changes in the values of the market of real estate.
Owners’ Equivalent Rent is a useful statistics which is generally followed by the homeowners and is tracked by Bureau of Labor Statistics. The OER is obtained with the help of surveys, by asking some questions. One sample question would be: “How much do you think can be the monthly rent of your home in today’s date?”
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