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Explain the problem in the measurement of rate of inflation?

Wednesday, July 25, 2012

Inflation is a rise in general level of prices of goods and services in an economy over a period of time.
The problems in the measurement of rate of inflation are footed below:
1. Data collection: Survey doesn’t include everybody. Example:  pensioners are excluded. They may have different spending habits. The collectors may not collect primary date; they may use secondary (recorded) data which may affect the value of rate of inflation.
2. Price variation: The prices of goods and services are not equal all over the country. Suppose good X may be found for Rs. 120 in Kathmandu and same good X may be found for Rs. 90 in Biratnagar. So, it is difficult to calculate the average rate, which may affect the value of rate of inflation.
3. Problem to construct Price Index Table (PIT): There are a lot of things to be listed in price index table. There will be thousands of products to be listed in the table. Any simple wrong placement of value will turn over the value of rate of inflation.
4. Changes in quality goods: The prices of goods today and last year may differ. Example- A computer today and a year ago will have different prices. The prices may not reflect inflation but it is difficult to compare the prices.
So, these are the some of the problems in the measurement of rate of inflation. Gf some of the solutions can be applied to these problems, the precise value can be obtained for the inflation rate.
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