Logo
Dalvoy
Back to Questions
67

Question 67

Consider the following statements:
1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2. The WPI does not capture changes in the prices of services, which CPI does.
3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?

AOptions

A
A) 1 and 2 only
B
B) 2 only
C
C) 3 only
D
D) 1, 2 and 3

BSolution

Let's compare the Consumer Price Index (CPI) and Wholesale Price Index (WPI) in India:

  • 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). This statement is correct. CPI measures changes in prices of goods and services purchased by consumers, and food items constitute a significant portion of a typical household's expenditure, hence they have a much higher weight in the CPI basket. WPI, on the other hand, tracks price changes at the wholesale level and has a relatively lower weight for food articles compared to manufactured products and primary articles.

  • 2. The WPI does not capture changes in the prices of services, which CPI does. This statement is correct. WPI measures inflation based on prices of commodities transacted in wholesale markets and includes only goods. CPI, however, reflects the retail prices of a basket of both goods and services consumed by households.

  • 3. Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates. This statement is incorrect. The Reserve Bank of India (RBI) adopted the Consumer Price Index (CPI-Combined) as its key measure for inflation targeting and for making monetary policy decisions (like setting repo rate, reverse repo rate, etc.) based on the recommendations of the Urjit Patel Committee. WPI is not the primary measure used by the RBI for this purpose.

Therefore, statements 1 and 2 are correct.

Diagram for Q67

CStrategy

For questions comparing economic indicators like CPI and WPI, thoroughly understand their definitions, what they measure (goods vs. goods and services), their respective weightages for different categories (e.g., food), and how they are utilized by policy-making bodies like the RBI.

DSyllabus Analysis

This question is from the Indian Economy, specifically covering topics related to inflation, price indices, and monetary policy.

EQuestion Analysis

Easy. This is a fundamental question testing the basic differences and uses of CPI and WPI, which are core concepts in macroeconomics.