Q.What is a Cost of Living Index (Consumer Price Index)? State one practical use of it.

A cost of living index is not a general price index — it is built specifically around the basket a particular group of consumers actually buys, weighted by how much they spend on each item.

A Cost of Living Index (CPI) measures the average change in the retail prices of a fixed 'basket' of goods and services that a specific group of consumers (industrial workers, government employees, agricultural labourers, etc.) typically buys, comparing a current period against a fixed base period. It is usually constructed by the Family Budget Method — a weighted average of each item's price relative, weighted by that item's share $w$ of total household expenditure in the base year:

$\text{CPI} = \dfrac{\sum \left(\dfrac{p_1}{p_0}\times 100\right)w}{\sum w}$ …

Confusing a Cost of Living Index with a general wholesale price index — a CPI is specifically tied to a particular consumer group's basket and expe …