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MrunalExplained:HeadlinevsCoreinflation,WPI,CPI,IIP

Mrunalhttp://mrunal.org

[Economy]IndexTheory:WPI,CPI,IIP,Components,Baseyear
CorevsHeadlineinflation,Laspeyresformulaexplained
PostedByOn21/08/2014@3:39amInFiscalPolicy|59Comments

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Prologue
[Act1]WHOcalculatesWPI,CPI,IIP?
[Act2]WHENtheypublishWPI,CPI,IIP?
[Act3]WHEREdotheygetdataforWPI,CPI,IIP?
1. WPIDataCollection
2. CPIDatacollection
3. IIPDataCollection
[Act4]WHATarethecomponentsofWPI,CPI,IIP?
1. #1:WPIcomponentsofWholesalepriceindex
1. WhatisHeadlineinflationWPI?
2. WhatisCoreinflationWPI?
2. #2:CPIcomponentsofConsumerPriceIndex
1. WhatisHeadlineCPIinflation?
2. WhatisCoreCPIinflation?
3. ConsumerFoodPriceIndex(CFPI)
3. #3:IIP:SectorwiseComponents?
1. IIP:GoodswiseComponents?
[Act4]WHYREVISEWPI,CPI,IIPseries?
1. RevisionofWholesalePriceIndex(WPI)
2. WPI:Newitemsadded:
3. SaumitraChaudhuriCommitteeonWPI
4. RevisionofConsumerpriceindexseries(IIP)
5. RevisionofIndustrialIndexproduction(IIP)
6. Comparison:WPI,CPI,IIP
[Act5]WHYWPI,CPI,IIPimportant?
[Act6]Otherindexes
1. Serviceperformanceindices(SPI)
2. BalticDryindex
3. ProducerPriceIndex(PPI)
4. Somemoreindexes
[Act7]Laspeyresformula

Prologue
Chapter4:PricesandMonetaryManagement.Threesubparts
Monetarymanagement,measuresofmoneysupply,UrjitPatel
IndexesTheory:WPI,CPI,IIP,Servicesindexandothers
IndexesCurrent:SurveyobservationsonWPI,CPI&IIP,Howtocombatinflation.
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Waitwhathappenedtoremainingchapters?
Ch.8to13publishedasarticles.
Chapter1to35to7availableaspowerpointandvideos.(Willreleasethemas
articlesafterprelimsanditsunofficialanswerkey.)

[Act1]WHOcalculatesWPI,CPI,IIP?

WPI

OfficeoftheEconomicAdviser
InDIPPDepartmentofIndustrialPolicyandPromotion
InMinistryofCommerce&Industry.

CPI

CentralStatisticsOffice(CSO)
MinistryofStatisticsandProgrammeImplementation(MOSPI)

IIP

SameasCPI

[Act2]WHENtheypublishWPI,CPI,IIP?
WPIdatapublication

Weekly

EveryThursday:PrimaryArticlesandFuelGroup
IfThursdayisholidaythennextworkingday

Monthly

14thofEverymonth:allcommodities

Final

Abovetwoareprovisionalbecausesomepricesarenotavailable.
Finallistreleasedtwomonths(~EIGHTweeks).Whentheyget
authenticpricedataforallcommodities.

Ifholiday,thenWPIdatareleasednextworkingday.
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CPIandIIP:Whenpublished?

CPI

Monthlybasis:forurban,rural,allIndia.
Annual:withlagofonemonth.
State/UTsseparateCPIsreleasedonlyiftheyprovide80%ofthe
necessarydata.

IIP

monthlybasiswiththetimelagofsixweeksfromthereferencemonth.
AlthoughIIPjustashorttermindicator.Theactualresultcomealongwith
AnnualSurveyofIndustries(ASI).

[Act3]WHEREdotheygetdataforWPI,CPI,IIP?
Sofarweknow,whomakestheindex,andwhentheyreleaseit.ButWHEREdothey
getthestatisticalinputs?

WPIDataCollection
Primaryarticles
Fuelandpower
Manufacturedproducts
total

Respectiveministries,dept,PSU,StateGovernments
Sameasabove
Leadingmanufacturingunits
676items

ProblemsinDatacollection
1. Sincethecollectionofpricesisonvoluntarybasis,theflowofpricedata,
especiallyfrommanufacturingunits,becomesirregularleadingtoproblemsin
compilationofWholesalepriceindex.
2. EconomicAdviserhascreatedawebportal,sofactoryownerscandirectlysupply
data.Butmomentumnotpickedupyet.Seemstheyretoobusychangingprofile
picsonfacebook.
3. Therefore,EconomicAdvisorshasmadearrangementwithNSSOtocollectprice
datafromthemanufacturingunits,untilwebportalbecomespopular.

CPIDatacollection
WhogivesdataforConsumerpriceindex(CPI)?
Urban
areas
Rural
areas

NSSOofficialssurvey.DataenteredintoNICwebportal.
NSSOofficials+PostalOfficials(ifNSSOcantreach).Notallvillages
surveyed,only~1200villages.

IIPDataCollection
WhogivesdataforIndexofIndustrialproduction
(IIP)?
IIPinformationSupplier
Items
DIPP:DeptofIndustrialPolicy&Promotion 430
IndianBureauofMines
61
Iron&SteelJointCommittee
47
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Chem.&PetrochemicalsDept.
TextileCommissioner
VanaspatiDirectorate
JuteCommissioner
Petroleumministry
RailwayBoard
FertilizerDepartment
CoalController
DirectorateofSugar
SaltCommissioner
TeaBoard
CoffeeBoard
CentralElectricityAuthority(powerMin.)
Totalitems

47
44
11
11
11
6
6
3
1
1
1
1
1
682

[Act4]WHATarethecomponentsofWPI,CPI,IIP?
#1:WPIcomponentsofWholesalepriceindex

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EconomicAdvisor,Lespeyersformula,Baseyear2004.
Threecategories,indescendingorderofWeight
WPIcomponents
ManufacturedProductsInternalweight:Chemical>metal>food
PrimaryArticlesinternalweight:Food>Nonfood>Mineral
Fuel&Powerinternalweight:Mineraloil>Electricity>Coal
totalweight

weight
64.97
20.12
14.91
100

Thesethreecategoriesarefurthersubdividedintopictureworth1000words.

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WhatisHeadlineinflationWPI?
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Numberwegetfromallcomponentsviz.primary,fuelandmfg.

WhatisCoreinflationWPI?
coremeans,weshouldignorefoodandfuelpart.
So,coreinflation=OnlyWPIofNonfoodmanufacturingindustries.
HeadlineWPI(primary+fuel+foodmfg.industries)

#2:CPIcomponentsofConsumerPriceIndex

CSOcalculatesusingLespeyersformula,Baseyear2010
Fivecategoryofitems.IvearrangedthemindescendingorderofWEIGHT
(CombinedAllIndia)
CPIcomponents
Food,beverages,tobacco
Misc.Healtheduetc.
Housing
Fuel,light
Clothing,bedding,footwear

Rural Urban Combined

59.31
24.91
NA
10.42
5.36

37.15
28
22.53
8.4
3.91

49.71
26.31
9.77
9.49
4.73

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Total

100

100

100

Mindit:RuralCPIdoesntconsiderHousinginflation.

Ranking
food,bev.,tobacco
Fuelandlight
clothing,bedding,
footware
Housing
Misc.

SubcategoriesRanking:CPI(Combined)
withinthathighestweightagegivento
Cereal>Milk>Veggies>..Sugar(lowest)
nosubgroup
(Clothingbedding)>Footware
Nosubgroup.
Transport>Medcare>Householdrequisites>>Recreation
(lowest)

WhatisHeadlineCPIinflation?
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Thenumberyougetfromcombineddataofabovecategories.

WhatisCoreCPIinflation?
CoreCPI=HeadlineCPIMINUS(foodandfuelcomponents.)

ConsumerFoodPriceIndex(CFPI)
BythesamegoodfolkswhocalculateCPI(=CSOwalla)
UsingsameLaspeyreformula
Usingsamebaseyear:2010
IftotalweightofCPI=100,thenFoodpriceindex=~52%ofitsweight

Componentsindescendingorder
Components
Rural Urban Combined
Cerealsandproducts
36.71 28.51 34.16
Milkandproducts
16.53 21.59 18.1
Vegetables
12.64 12.93 12.74
Oilsandfats
8.98 9.44 9.13
Egg,fishandmeat
6.5
7.38 6.77
Pulsesandproducts
6.25 6.11 6.2
Sugaretc.
4.64 4.11 4.47
Fruits
3.65 6.14 4.43
Condimentsandspices 4.1
3.79 4
Total
100
100
100
SofarwearedonewithcomponentsofWPI,CPIandfoodinflation.Movingon

#3:IIP:SectorwiseComponents?

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Weight:Mfg>>Mining>>Electricity
sector
weight items itemgroups
Manufacturing 755.27 620 397
Mining
141.57 61
1
Electricity
103.16 1
1
total
1000 682 399
Mindit:Totalweightis1000.So,ifyouwantpercentageweight,thenshiftdecimal
onepointtoleft.
Forexample:manufacturingweight=75.5%

IIP:GoodswiseComponents?
IIPdatareleasedintwoformats
1. Sectorwise:Mining,mfg,electricity(thatwejustsawabove.)
2. Goodscategorywiseusingthesamecomponentsasabove,butdatapresented
forgoodscategorywise.asshownbelow.
Basic
Goods
Capital
Goods

Anybulkrawmaterial/productusedinmanufacture.HighSpeedDiesel,
AviationFuel,Kerosene,Urea,Cementallkinds,Granites,iron,copper
andElectricity
Plants,machineryandgoodsusedforfurtherinvestments.Boilers,
compressors,engines,Transformers,CommercialVehiclesandall
machinerieslikeTextileMachinery,PrintingMachineryetc.

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Intermediate
Goods
Consumer
durable
Consumer
nondurable

usedformanufacturingofanotherproduct.Cottonyarn,Plywood,
Adhesives,Aluminumandsteelpipesetc.
canbeusedformorethan2/3years).PressureCooker,AC,tyre,Tv,
mobile,automobile,GemsandJewelryetc.
cantbeusedforlongperiods.FruitPulp,edibleoil,milkpowder,tea,
Cigarettes,Apparels,Newspapers,Antibioticsetc.

Goodswiseweight,Indecreasing
order:
IIP
Weight
BasicGoods
456.82
Consumernondurable 213.47
IntermediateGoods
156.86
CapitalGoods
88.25
Consumerdurable
84.6
totalweight
1000

IIP8coreindustries
1. WithinIIP,following8arecoreindustriesbecausetheyveimpactonalmostall
othereconomicactivities:
2. Coal,fertilizer,electricity,crudeoil,naturalgas,refineryproducts,steel,and
cement.

IIPDeflation
IIPisaquantitativeindex,theproductionsofitemsarebeingexpressedin
physicalterms.
Butforsomeitems,theinformationisreceivedinValuetermratherthanquantity
orvolume.
So,CSOusesWPIasadeflatortoconvertthatpriceintovolume.

[Act4]WHYREVISEWPI,CPI,IIPseries?
NowtimeforaFLASHBACKinthismovie
index newserieseffectivefrom
CPI 2011,January
WPI 2010,September
IIP
2011,June
Soifthesearethenewserieswetalkedaboutthenwhatwasthesystembeforethat?

RevisionofWholesalePriceIndex(WPI)
TheWPIserieshastoberevisedoften,becauseoftworeasons:
#1:baseyear
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Inflationisarelativeconcept.Whenwesaythereisinflationitmeansthings
usedtobecheaperatsomepreviousyear.
So,tocalculateWPI,weneedabaseyear.Baseyearshouldberevisedonceina
while.
#2:productmix
WPIcalculatesinflationusingLaspeyresformulaforweightedarithmeticmean.
Butthisformulafailstocapturethedynamicchangesinproductmixandstructure
oftheeconomyovertime.
Forexample,15yearsago,priceofVCRandmagnetictapecassetteswouldhave
mattered.Butnooneusesthemanymore.
Sameway,15yearsago,peopledidnotbuythatmuchmoisturizercreamsand
perfumes.
Hencewevetokeepchangingthecomponents.
BasedAbhijitSenCommittee
BEFORE
AFTERSenCommittee,WPIreform

NewsystemStartedfrom2010,Sep
Baseyear1993 2004
435items
676

Increasedno.ofpricequotations
1. Iffactorydirectlyexports,thendontcountthatvalueinWPI
2. Iffactorydirectlyimportsanitem,dontcountitinWPI.

Addednewitems.

WPI:Newitemsadded:
Listnotexhaustive
Primaryarticles
Lemon,GaurSeed,Rose,Jasmine,Marigold
Crudepetroleum,CopperOre,ZincConcentrate
Manufactureditems
ComputerStationery,UPS,SMPS,VCDplayer
DishAntenna,FibreOpticCable
Perfume,ScentCream,Moisturizer,BodyPowder
LeatherGloves,jackets,garments,bags
Football,Toothbrush

SaumitraChaudhuriCommitteeonWPI
CurrentWPI
676items
11vegetables

Saumitrarecommends
~1200items.
17
Expectedtobeoperationalfromnextyear

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Collectpricesfrommorecentres,togetbetterestimate.

Reduceweightofprimaryfooditems.Increaseweightofmfg.items
Baseyear2004 2009,Andthento2011
EnoughofWPI,movingon

RevisionofConsumerpriceindexseries(CPI)
PROLEMBefore

Specificgroupsonly.
(Baseyearinbracket)
Industrialworkers
(2001)
agricultural
laborers(1986)
rurallaborers
(1986)

SOLUTIONAfter
Startedfrom2011,January
baseyear2010

1.
2.
3.
4.

Rural
Urban
combined(+state/UTwiseseparatelyreleased)
ConsumerFoodPriceIndices(CFPI).

Problem=doesntgive
wholepicture
ItemlistdesignedbasedonNSSOs2004survey.Infuture,
CPIwillberevisedusingNSSOs2011survey.
Mindit:thisdoesntmeantheynolongercalculateCPIforindustrialworkersAgro&
rurallaborers.Theystilldoit.

RevisionofIndustrialIndexproduction(IIP)
EachIIPitemshouldhavecertainminimumcontributiontonationalproduction.
ForexampleVCRindustryscontributioninTodayseconomy=0%
Therefore,needtoupdatelistwithbasedontechnologicalchanges,economic
reformsandconsumptionpatternsofthepeople.
IIPBefore
IIPAfter

C.P.ChandrasekharCommittee
Baseyear:
2004
1993
Addednewitems:Apparels,GemsandJewellery,Newspapers,
pasteurisedMilk,Writing&PrintingPaper,AyurvedicMedicaments,
WoollenCarpets,WoodFurniture,TerryTowel,CoirMats&Mattings,
PolytheneBags,InstantFoodMixes,FruitPulpetc.
16.
Information
source
MSMEdroppedasasourceagency.
agencies:
ChemicalandFertilizerDepartmentadded
15
So+2minus1=1increase
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NIC1987

ItemsusedfromNationalIndustrialClassification(NIC)2004
Increasedweightgiventominingandelectricity
Decreasedtheweightgiventomanufacturing
AskedMSMEministrytodevelopaseparateindexforMSME
sector

Comparison:WPI,CPI,IIP
QUESTION
HOW?
WHO?
WHEN?
WHEREthey
getdata?
Components
types
items
baseyear
CORE

Whatdidwelearnsofar?
WPI
CPI
Lespeyresformula same
Economicadvisor CSO
weekly&monthly monthly
ministries,dept.,
NSSOandPostal
industries
workers
3:MFG>Primary
5categories
>Fuel
Rural,urban,
onlyoneWPI
combined
676
2004
2010
nonfood
headline
manufacturing
(food+fuel)

IIP
same
CSO
monthly
ministries,dept,bodies
3:MFG>Mining
>electricity
Sectorwiseandgoods
Usagewise.
682
2004
8industries

[Act5]WHYWPI,CPI,IIPimportant?
Yes,whybothercalculatingWPI,CPIandIIPinthefirstplace!?

WhyisWPIimportant?
Monitorsthedynamicmovementofprices.
Who
Government

WhytheyuseWPI?
Todesigntrade,fiscalandothereconomicpolicies
Todesignmonetarypolicy,underMultipleindicatormethod:RBIused
RBI
WPI.(ButRajanstartedusingCPIforthispurpose,sinceApril2014,
onUrjitpatelrecommendation.
Inthebusinesscontracttocalculatepriceescalationclausesinthe
Businessmen
supplyofrawmaterials,machineryandconstructionwork.

WhyCPIimportant?
Measuresthepriceofgoodsthathouseholdsconsume.

Government

Monitoringpricestability.
CalculatingDearnessAllowance
UsingasDEFLATORinnationalaccounting

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TodesignmonetarypolicyfromApril2014onwards,basedon
UrjitPatelrecommendation.

RBI

Businessmen CalculatingDearnessAllowance

WhyIIPimportant?
1. TheIIPmeasuresvolumechangesintheproductionofaneconomy
2. Providesameasurementthatisfreeofinfluencesofpricechanges
3. DatausedinGovernmentpolicyplanningpurposes,IndustrialAssociations,
ResearchInstitutesandAcademicians.

[Act6]Otherindexes
Serviceperformanceindices(SPI)
Index Doesitcoverservicesectorinflation?
WPI Nope
CPI Partiallye.g.education,healthcare
Itdoesntcaptureinflation.Itcapturesincrease/decreasein
production.
Butheretoo,Servicesectorproductionnotcounted.

IIP

Anyways,EconomicAdvisorstartedservicespriceindices(SPI).(recallhealso
doestheWPI).
Onexperimentalbasis.
Tocaptureinflationinfollowingservicesectors:
Railways
SPIs

freightandpassengerservices

Banking
SPIs

servicesforwhichbankschargefees,commissions,brokerage,etc.
RBIgetsthemdatafrom21banks(13sarkaari,4private,2foreign,
1cooperativeand1RRB).

Postal
SPIs

onlyDepartmentofPosts.
Hardlytellsanything,becauseitIGNORESfollowing:
Privatecouriercompanies
postalservicetoarmedforces(fornationalsecurityissue)
moneytransferviaWesternunion,IPO,moneyorderrevenue
stamps.

Telecom
SPIs

onlyforcellularservicesonthebasisTRAIreport.Quarterlybasis.

AllofthemusesameLaspeyresformula.

BalticDryindex
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LondonbasedBalticExchange,releasesthisindexnumberondailybasis.
Measurescosttotransportrawmaterialsbysea.
IfBaltic
number

meaning

Increases

Morerawmaterialshipped.Worldeconomygrowing
WashighestinMay2008(~11,800).

Decreases

Reverseimpactoneconomy.
After2008,Afterthatcontinuousdeclineduetosubprime,and
eurozonecrisis.
LowestMay2014(982)

ProducerPriceIndex(PPI)
measurespricechangefromtheperspectiveoftheseller.
i.e.averagechangeinsellingpricesreceivedbydomesticproducersfortheir
output.
Coversbothgoods+services.(WPIonlycoversgoods)
Sellersandpurchaserspricesdifferduetogovernmentsubsidies,taxesand
distributioncosts.Therefore,bettertousePPI.BcozCPIdoesntcoverthis.
MajorityoftheOECDcountriesmeasureinflationbasedonProducerPriceIndex
(PPI)
WPIhasbeenreplacedinmostcountriesbyProducerPriceIndex(PPI)duetothe
broadercoverageprovidedbythePPIintermsofproductsandindustries
PPIhasmoreconcordancewithsystemthenationalaccount.(comparedtoWPI)
Therefore,OfficeoftheEconomicAdviser(OEA)hastakenuptheinitiativefor
constructingaProducerPriceIndex(PPI)forIndia.
Somenotablecountries
IrelandusesBOTHWPIandPPI
OnlyWPI
Japan,Australia,Greece,Norwayand
Turkey

OnlyPPI
Canada,USA,Aussies,S.Korea,UK,
Spain,Italy

Somemoreindexes
RBI

OBICUS

Inflationexpectationsurveyofhouseholds.
Forthreemonthsand1yearaheadperiods.
OrderBooks,InventoriesandCapacityUtilizationSurvey
(OBICUS)
ByReserveBankofIndia(RBI)
Toassessconsumptionandinvestmentdemand
Surveying~2500companiesinmanufacturingsector

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Timeframe:quarterly

ASI

AnnualsurveyofIndustries
ByNSSOunderStatisticalministry
Tosurveymanufacturingsectorsgrowthandstructure
Surveyingeverymfg.unitemploying10workersormore.
Annually

HSBC

IndiaManufacturingPurchaseManagersIndices(PMI).
Monthlybasis

NEER|REER

willseethemwhenIpublisharticlesforch6and8.inthe
meantimeyoumayrefertothepowerpointorlecturevideos..

[Act7]Laspeyresformula
Notforprelims.ButwhentheywanttobeginSTRESSinterviewparticularlyduring
bank/MBA.
LaspeyrewasaGermaneconomist.
HisformulausedincalculationofWPI,CPI,IIP,servicepriceindices.
ItisaWeightedarithmeticmean.
Letsunderstandwithacrudeexample.
SupposealocalthugsINFLATIONindexusesfollowingformat,with2004as
baseyear.
Hecanonlydecidethebaseyearandweightsassignedtoeachcomponentson
hisown.Condition:heshoulddistributetheweightinsuchmannerthattotal
weightis10,100,1000thatway%calculationiseasier.
Afterthat,monetarypolicies,fiscalpoliciesandmarketforceswilldeterminethe
pricesinbaseyearandcurrentyear.Hejusthastoapplyformula.
So,exceldatalookslikethis:
Components weight 2004prices 2014prices
Desiliquor
10
Rs.10
Rs.15
Gutkha
20
Rs.2
Rs.5
Cinema
70
Rs.50
Rs.75
Weight
100
First,Illfindrelativeprice(CurrentpricesdividedbyBASEyearsprices)
Components weight 2004prices 2014prices
Desiliquor
10
Rs.10
Rs.15
Gutkha
20
Rs.2
Rs.5
Cinema
70
Rs.50
Rs.75

R
1.5
2.5
1.5

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NowIllmultiplyRelativepricewithweightassignedtoeachcomponents
Components weight 2004prices 2014prices
Desiliquor
10
Rs.10
Rs.15
Gutkha
20
Rs.2
Rs.5
Cinema
70
Rs.50
Rs.75
Total
100

R
1.5
2.5
1.5

RxW
15
50
105
170

Finally,theadditionofRXWwillmeindexnumberforcurrentyear.
15+50+105=170.
ThatmeansCurrentinflationin2014,is70%,comparedtothepricesinbaseyear
2004.
In2015,IfIgetthenumber180=80%inflationthanbaseyear(2004)
Butcomparedto2014,the2015syearoninflationwouldbe(180170)/170=~6%.
Statisticallywecanexpresswiththisformula:

Note:somebooksuseP0/Q0,itsbasicallythesame.Becausetheytakeweightas=
(pxq).
Someotherindexes(onlyGIST,notgoingindetails)
Paasche TellsuswhattodaysBasketofcommodities,wouldhavecost
index
@yesterdaysprice.
Fisher
Geometricmeanof(LaspeyreseandPassche).Thissolvetheproblemof
index
substitutionbiasinconsumerExpenditure.
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