PRICE RELATIVE =[P1/P0]X100

Price Relative Calculation:

The price relative is a measure used to compare the price of a commodity or a basket of goods at a given point in time with its price at a base year. It provides a way to understand the change in the price level over a period.

To calculate the price relative, we need to follow the steps mentioned below:

Step 1: Determine the base year
In this case, the base year is 1980.

Step 2: Calculate the price relative
The price relative is calculated by dividing the price of the commodity in a particular year by the price of the same commodity in the base year and multiplying it by 100.

Price Relative = (Price in Given Year / Price in Base Year) x 100

Given that the price of the commodity in 1975 is Rs. 25 and in 1980 is Rs. 30, we can calculate the price relative as follows:

Price Relative (1975) = (Rs. 25 / Rs. 30) x 100 = 83.33
Price Relative (1980) = (Rs. 30 / Rs. 30) x 100 = 100

Interpretation of Price Relative:

The price relative provides a measure of the change in the price of a commodity over time, relative to a base year.

In this case, the price relative for 1975 is 83.33, indicating that the price of the commodity in 1975 was 83.33% of the price in the base year (1980). This means that the commodity was relatively cheaper in 1975 compared to 1980.

On the other hand, the price relative for 1980 is 100, indicating that the price of the commodity in 1980 is equal to the price in the base year. This means that there was no change in the price of the commodity between 1980 and the base year.

Benefits of Price Relative:

The price relative provides a useful tool for analyzing the changes in the price level over time. Some of the benefits of using the price relative include:

1. Comparison: It allows for easy comparison of the price of a commodity between different years, enabling us to understand the trend in price changes.

2. Base year selection: By choosing a base year, we can easily compare the price of a commodity in different years relative to that base year.

3. Inflation analysis: The price relative helps in analyzing the impact of inflation on the price of a commodity. If the price relative is greater than 100, it indicates inflation, while a price relative less than 100 indicates deflation.

4. Policy decisions: The price relative is valuable for policymakers to assess the effectiveness of their policies in controlling inflation or deflation and making informed decisions.

In conclusion, the price relative is a useful measure to compare the price of a commodity between different years. It helps in understanding the trend in price changes and analyzing the impact of inflation or deflation.