Question

What is inflation and how do we measure it? Which prices does each of the major price indexes actually measure? How can a price index be used to convert nominal output into real output?

Answer 1

Inflation is nothing but the increase in the general price level in the country all in all. Price indexes usually measures the normalised average of price relatives of a class of goods in a given interval of time all in all. With the help of q base year where price index is usually taken as 100, the price index for the current year can be calculated relative to that and dividing it with nominal output gives real output.

Nominal output* CPI (base year)/CPI(current year) = Real output