‘CONCEPT AND DEFINITION OF INDEX NUMBERS ‘concept of index number can be best understood through an tion. Let us consider a situation of rising prices during the ‘9022. In this context, we are faced with three basic questions "compared to which year haye the prices risen during 20227 , how do we handle the situation when the prices of some rise more than the others? [indly, can prices of different be expressed in terms of any standard unit or different are to be used to express prices of different goods and , such that the price of milk is to be expressed in terms 5 per litre, of cloth in terms of rupees per metre and ts in terms of rupees per kilogram. The study of Index 1's answers all these questions: /rv/, rise in prices during would be studied only with reference to some previous years 2004 or 2011. Otherwise, the mere statement that prices ing 2022 have tended to rise would make no sense. 2022 be treated as the current year and 2004 or 2011 as the base : Prices during the base year are taken as 100. Prices during ‘current year are related to the base year price. So that, we out percentage change in price level over the yea ice is called the index of price. Since price of the base year ed to be 100, we can say that index of price of the base ris always 100. Ifbase year is 2011 and the price inex is 100, lifin the year 2022 prices are doubled, we shall conclude that index of price in the year 2022 has shot up to 200 compared 100 in the base year. As regards the second question (how do handle the situation when prices of some goods change more the others) the study of index numbers suggests to take change. Thus, if the price of Potatoes has risen from £9200 and the price of Onions has risen from 100 to 300, we 200 + 300 _ 959, “onsider average change only, v= an. 412 Statistics for Economics index of prices for the various tis, it is the average a ted for different years < which is construc "a a servic with the base year: joo), as regards the problem goods and services in some "aig Fades Numbers suggests to consider only percentage ¢y 0" of ods and services. Once a change jg tei of expressing the pricey oF homogeneous units, then” prices of various gi 4 in prj Expressed as a percentage change, the unit of the cqqh eis (like litre of a milk, or metre of a cloth) loses its relevance. Thus, what does the study of Index Numbers do? tt hey ge in the values of different ela find out pereentage cha lei ial (may be prices of different goods or production of q; commodities) over time with reference to some base ye eg iH febeny 1 happens to be the year of comparison. When various goon studied simultaneously, the percentage change is taken ae ae wverage for all the goods. Definition In the words of Spiegel, ‘ln. Index Number is a Slatistical meno designed to show changes in a variable or group of related varwabey i respect lo time, geographic location or other characteristics According to Croxton and Cowden, “Jndx Numbers ave deers jop measuring difference in the magnitude of a group of related variables 2. FEATURES OR CHARACTERISTICS OF INDEX NUMBERS Following are the three specific features or characteristics of index numbers: (1) Relative Changes: Index numbers measure relative oF percentage changes in the variable(s) over time. Index number of prices, for example, is not simply a statement of prices at different dates, it presents estimates of percentage changes in the prices over years with reference to some selecied base year. If index of prices stands at 200 in 202 compared to 100 in 2011-12 (the base year), it sugges that compared to the base year, prices have risen 100 per cent (2) Quantitative Expression: Index numbers offer 4 PF measurement of the quantitative change in the concern variable(s) over time. The index of prices, for example; ¥ tell us that between the years 2021 and 2022, prices ha risen by 7 per cent, or that industrial production has dee4 per cent or that national income has risen just by per cent during this petiod. ‘The index numbers are not {qualitative statements like prices are rising or falling. ges: Index numbers show changesin terms ofaverages example, when it is said that between the years 2021 2022, prices have risen by 7 per cent, it does not mean ices of all goods and services have uniformly risen by "cent; it only means that on an average there has been a cent rise in the prices of various goods and services. when prices of certain goods might have risen b: than 7 per cent and of certain others by less than “ ‘There are various types of bers, constructed with different objectives. Before g an index number, one must define the objective. The construction of index number is significantly influenced objective or purpose of the study. Thus, for example, xe objective is to study the impact of change in the value of ‘on the consumers one should construct consumers’ index number. If we are to study the impact of change ‘purchasing power of money on the producers, we ll construct index number on the basis of wholesale es, Haberler has rightly pointed out that, “P)//1/ index Rare constructed to fulfil different objective and. before setting ia particular index number, one must clearly define one’s “of study because, itis, on the objective of the study, that the and format of the index number depends. tion of Base Year: Selection of Base Year is another in the construction of index number. Base year is year, It is the year with which prices of the Pent year are compared. As far as possible, Base Year d be a normal year. is, it should be the one without much ups and downs. ,, the index values would fail 10 capture the real in the variable. of Goods and Services: the problem is of the selection 0 included in the index number mers’ Price Index, for example, al Sxiduded, {1 is neither possible nor desirable to ine num Having defined. the f goods or services ‘To construct the II commodities are Jude RnePre Tera ec uke (i) Purpose of constructing index number of prices is to know the relative ‘change or percentage change in the price: level (made up of ssimpie or weighted average of the prices of different goods and services) over lume A rising general price level over time: is a pointer towards inflation, while a falling general price level isa pointer towards: deflation. Both inflation as weil as_ deflation have notable ‘consequences for an overall economic ‘activity in theeconory. ( Purpose of constructing index number of quantity is to know relative change or percentage ‘change in the quantum or volume of output of different goods and services over time. Thisreflects the level of economic activity. Inthe economy and its different sectors. A ‘ging index of quantity ‘suggest a rising level of ‘economic activity and vice versa index Numbers 413(A) Selection of the Prices of the Goods and Services: jj, (5) Finding the Average Prices: In the construction of indey (6) Selection of Weights: While constructing index number (7) Choice of Average: In finding out average value 414. Statistics for Economics shin ate at s produced in the country, yy choose those goods a1¢ ce avket In other words, commodities say. ! are widely consumed, for example, tt Larger the number of 00d, Tice, is the index number, and others in the should be such 2 milk, ghee, cloth, ete. services more representativ selected the goods and services, the problem arises of yr to be selected. Broadly, in the construction of Price Inde. the problem is whether to adopt retail prices or wholesale | prices, controlled or open market prices. The choice wong. depend upon the objective or purpose of the study. | number, base year value is assumed to be 100 and other values of different years are related to 100. Thus, if cloth price is © 5 per metre in the base year and is found to be Z 10 per metre in the current year, the index of prices of cloth would be 12x 100 = 200 for the current year Likewise, price relatives for other commodities are worked out and average for these price relatives is determined and compared with the base year value of 100. It may be noted here that average of base year remains 100, but the average of the year under investigation may be more or less than 100. In case the average of the year under investigation is more than the average of the base year, it means that general price level has gone up. If it is less than the base year, it means that general price level has gone down. Generally, base year is indicated as ‘0’ and current year as ‘I’. Price index is written as Pp, and itis read as price index of year! in relation year 0. weights are accorded to different commodities according to their relative significance. There are several methods according weight, eg., Fisher’s method, Paasche’s meth Laspeyre’s. method. While constructing weighted ind! number, one must justify his choice of weighting techn" in accordance with the nature and objective of his st: diffe ‘arith flue! die kinds of average may be used, geometric average, average, etc, The choice of average significantly the results, Different kinds of averages may gi index number of a given change in price.a cd, son of Formula: Index numbers can be constructed 8 eee ie help of many formulae, such as, Laspeyre’s method, he’s method. Dorbish and Bowley’s method, Fisher's shod. One has to decide about the method to be used mile constructing the index number, ADVANTAGES OR USES OF INDEX NUMBERS of the main advantages or uses of index numbers are as Measurement of Change in the Price Level or the Value of Money: Most important use of index numbers is that index numbers measure the value of money during different periods of time. We can use index numbers to know the impact of the change in the value of money on different sections of the ‘society. Accordingly, devices or means can be worked out to correct inflationary or deflationary gaps in the system. Knowledge of the Change in Standard of Living: Index numbers help to ascertain the living standards of people. Money incomes may increase but if index numbers show ‘a decrease in the value of money, living standards may even decline. Thus, index numbers indicate change in real ‘income. Adjustments in Salaries and Allowances: Cost of living index isa useful guide to the Government and Private Enterprises t0 make necessary adjustments in salaries and allowances of the workers. Increase in the cost of living index suggests increase in salaries and allowances. Useful to Business Community: Price index numbers serve s.a usefull guide to the business community in their planning and decisions. Trend of the prices significantly influence | their production decisions. | Information Regarding Production: Index numbers of production shows whether the level of agricultural and industrial production in the economy is increasing t decreasing. Accordingly, agricultural and industrial lopment policies are formulated. rmation Regarding Foreign Trade: Index of exports 4nd imports provides useful information regarding foreign Made. Accordingly, export-import policies are formulated. Useful to Politicians: Politicians come to know of the real ‘“Conomic condition in the country on the basis of index Aumbers. They offer constructive criticism of government's index Numbers 415eT (ta ‘These are: (0 There-are no scientific techniques of ‘according weightage to different items included in the index numbers, (8) Weightage to different items is often influenced by personal bias. (Gi). Owing to difference nthe unit of currency as well as difference in the composition of production (and Consumption) across Gifferent countries of the world, tis often very difficult to construct index Numbers that facilitate international comparisons, 416 the theo econte in the country. (8) Useful to Government It is with the help of numbers that the government determines its myc fiscal policies and takes concrete steps for the gata development of the country: In other words, with yp index numbers government formulates approprigy Pa to increase investment, ouput, income, employment aes price level, consumption, etc le, policies and give suggestions for economic Felorm, 5. LIMITATIONS OF INDEX NUMBERS In the construction of index mumbers, there are some praca 3 difficulties and theoretical limitations. The same are as under; (1) Not Completely True: Index numbers are not fully ‘ue For example, one can only make an estimate of change the value of money with the help of index numbers. Ty. index numbers simply indicate arithmetical tendency ofthe temporal changes in the variable. (2) International Comparison not Possible: Different countries have different basis of index numbers. These do not help international comparisons. (3) Difference of Time: With the passage of time, it is diffcul to make comparisons of index numbers. With the changing times, man's habits, tastes, etc., also undergo a change Consequently, index numbers constructed on the basis of old consumption pattern cannot be compared with the index numbers constructed on the basis of new consumption pattern, (4) Limited Use: Index numbers are prepared with certain specific objective. If they are used for another purpose they may lead to wrong conclusions. For example, index numbers prepared to know about the economic condition of the teachers cannot be used to know about the econome condition of the labourers. (5) Lack of Retail Price Index Numbers: Most of the inte numbers are prepared on the basis of wholesale pt ae in real life, retail prices are most relevant, but it ts oe to collect retail prices. Index numbers based on whe! prices may be misleading. With regard to the limitations of index. numbers, Coulbous has rightly said, “Fn (his changing world it is diffieul! te tical defects and in future, as far as we ean see, Statistics for EconomicsyyptE AND WEIGHTED INDEX NUMBERS and ‘weighted’ are the two broad categories of index aiyere is a brief description of these concepts, pte Index Numbers index numbers in which all items of the series are «af equal weightage or importance, In case of a simple prices, for example, all goods and services are to be Equal weightage, no matter whether sale/purchase of js more than that of the others. It will be a simple re of the prices of different goods and services ce are the scare the index numbersin which different items ofthe series peecorded different weightage, depending upon their relative saetance. It is not a simple average of prices of different goods renices, as in case of a simple price index. Instead, itis to be ted average of the prices of different goods. Thus, if the ature on rice is twice the expenditure on cloth, then in the truction of price index, price o} weight compared to the weightage of gh difficult to construct, weighted in era much more realistic view of the change ov' e simple index numbers. METHODS OF CONSTRUCTING INDEX NUMBERS The following chart show: dex numbers (Simple as well as weigh In the simple index all items of the series are treated as of equal importance Inthe weighted index, weights rice! may be accotded ‘2 as Sraaeameaaaa saris “ items depending on their relative importance. “P’ to the price of cloth dex numbers certainly er time compared the various methods of constructing nted): Methods of Constructing Index Numbers Construction of Weighted of Simple Index Numbers Weighted simple average otic] WN vesmethod] Aggregate Method | Weighted Average of Relatives Method attempt a brief description of the variows methods. index Numbers AV7190 far trom the pend of study Otherwese, relate cnenge over ume wae net make mrasoh sense. (orhe shout be oethes M8 CONSTRUCTION OF SIMPLE INDEX NUMBERs There are two methods of constructing simple index numb, f (1) Simple Aggregative Method In this method, aggregate of the prices of commodities jy current year are divided by the aggregate of their prices in the base year and multiplied by 100 to get index value for the curreqy year. It is expressed by the following formula: FORMULA yp, Po = So! «100 Py, Here, Pj, = Price index of the current year: EP, = Sum of the prices of the commodities in the current year. BP, = Sum of the prices of the commodities in the base year Current Year: Current year is the year for which average change is to be measured or index number is to be calculated. Base Year: Base year is the year of reference from which we want to measure extent of change in the current year. The index number of base year is generally assumed to be 100. Miustration. Given the following data and assuming 2011 as the base year, find out index value of the prices of different commodities for the year 2022. Pee 5 £ fomenre ln A B € D a Pree OED Ea GS) 50 40 10 5 2 Zeeks) 80 60 20 10 6 Solution: Construction of a Simple Index Number— Simple Aggregative Method Prats) cA) rome ia Statistics for EconomicsSP, rou = SP, * 100 176 = 107 x 100 = 164.49 index = 164.49 ple average of Price Relatives Method asin cording t0 # coanmoity an his method, we first find out price relatives for each d then take simple average of all the price relatives. what is Price Relative? a price relative is the percentage ratio of the value of a variable inthe current year tO Its value in the base year. In other words, a relative is a percentage ratio between price ofa commodity in the current year and that in the base year. Year Price (P) r Price (Py) x 100 Price Relatives, Py = © i Wecan find out price index number of the current year by using the following formula. FORMULA “(Pi 2 r x or Paseo (Here, Fx 100 = Price relatives; N = Number of goods; 5 p P, = Base year’s value.) | = Current year’s value; Mustration. Given the following data and using Shige an index number for the ye# 8, te ere ay 100 (per qe the Price Relatives Method, r 2022 in relation to 2011Solution: Construction of a Simple Index Number— Simple Average of Price Relative Method Cr ee ey errr ss Eye) co) ee Uee Tt Ly tL) B co} 200 wheat | 100¥perqo | 2004perq) | 20 100 = 209 Ghee S(perkg) | 40 (per kg) 40 5100 = 500 16 Milk 2 (per!) 16 (per) 2 * 100 = 809 800 Rice 200 (per qt) | 800 (per qt) 300 * 100 = 400 Sugar 1 (per kg) 6 (per kg) t x 100 = 600 ne = (Bi x100) Price Index = 500. CONSTRUCTION OF WEIGHTED INDEX NUMBERS ‘There are two methods of as discussed below: constructing weighted index numbers, (1) Weighted Average of Price Relatives Method According to this method. weighted sum of the price relatives 8 r 5 pric divided by the sum total of the weights. In this method, goods given weight according to their quantity. Thus, FORMULA (Here, P,, = Index number for the cur in relation (© tae yea We Weatitihoee rent year in rel relative.) 420 Statistics for Economicsihe following data and using Weighted Average Price Method, construct index number for 2022 based on pr arney i) 100 (per qu) 200 (per qt) 200 (per qt) 800 (per qu) 2 (per) 16 (per 2) 8 (per kg) 40 (per kg) 1 (per kg) 6 (per kg) Piss 7) 40 %100 per qe | %200 per qt a x 100 = 200] 200 x 40 = 8,000 30 2200 per ge | 7800 per qt | S0x 100 = 400] 400 x 30 = 12,000 15 Z2per! 16 perd 16 199 = 800 | 800 x 15 = 12,000 10 Zs per kg Z40perkg | 22x 100 = 500 x 10 = 5,000 5 Zi perky TG per ky fx 100 = 600 | 600 x 5 = 3,000 DW = 100 RW = 40,000 P, 40.000 _ 400 : 100 Index = 400. Weighted Aggregative Method = this method different goods are accorded weight ding to the quantity bought. Economists have different ithe {8 Tespect. Should the weight be given (i) on the basis Te Wantity bought in the current year or (ii) om the basis of SE SaMtity bought in the base year oF (iii) on the basis of the ties bought in both the years? Different economists have, Me, suggested different techniques of weighting. Some of own methods are as under IndexNumbers 421What is the basic CO eee titeclincaan Lerman) (i) Laspeyre’s Method: Laspeyre’s uses weights of different items, His formula for estimating ee values is: ex FORMULA 2 Pre » 2 Pido 199 2 Pode (ii) Paasche’s Method: Paasche’s on the other hand uses (q)) as weight. His formula to construct the Index value is: FORMULA eS =P XP «100 (iii) Fisher’s Method: Fisher has combined the techniques of Laspeyre’s and Paasche’s method. He used both: hase year os well as current year quantities (gy 4) as weight. His formula to construct Index Number is: FORMULA P VX Pod Fisher's method is treated as Ideal Formula FISHER’S INDEX NUMBER AS AN IDEAL METHOD ‘The choice of method for the construction of an index number will depend upon the object with which a particular index number is constructed. Many formulae may be used for the construction of index numbers but all may not be suitable for the specific purpose in hand. Some of the important formulae do no! conform to certain appropriate test of consistent behaviours it implies that these formulae give us biased results. However, Fisher's Method is considered as an ideal method for constructing index numbers: =f Seite x EP 100 01” 4/ Epo, ~ ZP 4 Fisher's method is considered as ‘ideal’ because (i) Ivis based on variable weights. : (ii) It takes into consideration the price and quantites the base year and current year, ‘gs the (iii) 1 is based on geometric mean (GM) which is regarded ® best mean for calculating index number: of both 422 statistics for Economicsimplies ae ja for calculating an Index Number should Nuch that will give the same ratio between one point of ison and the other, no matter which of the two is ‘as base. Time Reversal means that if we change base to current year and vice versa then the product of two indexes should be equal to unity. Thus, an index number id work both ways, i.e., forward as well as backward. the other hand, Factor Reversal Test implies, just as our formula should permit the interchange of two items without iving inconsistent results, so it ought to permit interchange ‘of prices and quantities without giving inconsistent results, je, the two results multiplied together should be equal to value ratio. index numbers of prices of the items in the year 2022 following data by: Laspeyre’s Method, Paasche’s Method, and Fisher's Method. oA 10 10 20 25 B 35 3 40 10 ec 30 5 20 15 D 10 20 8 uy E 40 2 40 5 Construction of Price Index Numbers 10 10 20 5 (a 8 40 0 sb S, A ie 150 10 20 8 20 ko | 40 2 “0 bes Index Numbers 423 ZzZPiMo (i) Laspeyre’s Method: Po) = Sp.q, *100 «100 = 105.94 =P,4, (ii) Paasche’s Method: Po, = 55 ; 5p.q,* 100 _ 1,560. 450 [EP Ao , ZPoI £560 | 635 * 1, 450 © = /1.03x1.07 x 100 V1.1021 x 100 1.05 x 100 = 105 *100 (iii) Fisher’s Method: Po = Illustration, Find out index value from the following data using (i) Laspeyre’s . Method, (ii) Paasche’s Method, and (iii) Fisher's Method. rer Base Year Base Year Current Year Current Year ery eked) Porerttin a A 6 10 8 iF] B 4 15 5 20 8 9 Solution: es id ] A | 6 B | tea Jc]: ye) 3 oi : —— is Spit = 235 | Spon = 187 (i) Laspeyre’s Method: Py, = She x 100 040 = Tae 100 = 195.67 5 424 statistics for Economicsn= 8 ne = (2B v 187 = poveetatesith = ¥1.3483 x 100 = 1.1612 x 100 = Pree re on fren) coe eee ee oar arg emma) Py = [EP iG ZP14 x 100 TPodo LPod Fhe cee xT? 100 = V1.9423 x100 = 1.3937 x 100 = 13997 index Numbers 425Learning by doing © Using Simple Aggregate Method and Price Relatives Method, find out index yay > values f vom the following data. 7 the yoy A 15 30 (Ans. 13668, aaa ¢ Find out index value by the Price Relative Method for the year 2022 fom the loving 14 ys = vs ving data Ttems a A B c D Ello; ) be = loc | 2011 Price® | 100 | 10 Fi 1 5 4 2022 Price @) | 100 9 4 2 1 250 | py ors 1} (Ans 6839 ‘© Construct an index number by Price Relatives Method using 2011 as base year. | Goods 1 A B ig is | 2011 Price @) 8 10 15 I | 2021 Price @) 10 12 18 2 4 | 2022 Price @) | 12 4 20 B ph. (Ans. 118.75, 137.08) © Construct an index of prices using 2011 as the base year and Price Relatives Method. Goods Weight 2011 2021 sor] { A | Ss 10 2 uw | B | 3 5 6 8 } c i 4 5 1 4M (Ans. 121, 189) 8. CONSUMER PRICE INDEX OR COST OF LIVING INDEX NUMBER So far we have been focusing on general price indices. a a indices do not precisely explain how the change it 87°F level affects the cost of living of the various classes of oe ia is because different classes of people consume citer citterent™ services. Accordingly, the change in prices affect them di To know the effects of changing prices 00 the living i. called 7 F price inde® classes of society, we need a special type of P™ mer Price Index or Gost of Living Ind lex Numbe : 426 statistics for Economicspilex is the? index nun I es paid by the specific class of « 1 by them in the current yeu yor ee ened class of consumers. Accordingly, consumer price Hed cost of livi indices are mainly constructed for indices, Baca jn India, the consumer price fhefollowing consumer BTOUPS: ai Workers (IW). @ Industria @ Urban-Non Manual Employees (UNME) ‘i iii) Agricultural Labourers (AL), ‘Construction of Consumer Price Index Construction of the consumer price index number involves the following steps: ‘{l) Selection of the Consumer Class: Consumers are classified into various classes like industrial labour, government employees, agricultural labour, teachers, etc. We should select the class of consumer according to the requirement of our study. Q) Information about the Family Budget: After the decision about the group, a sample of persons should be selected from the group and following information about their family budgets should be obtained: (i) Commodities which they consume. 4) Quantity of consumption. Iii) Prices of the concerned goods and serv (¥) Money spent on these goods and service: aay be classified The items which are generally consumed in groups like (i) Food, (ii) Clothing, (ii) Fuel and light, (iv) House rent, (v) Education, health and_ sanitation, (vi) Miscellaneous, ®) Choice of Base Year: ‘The base year should be the year of €onomic stability, It should not be too distant from the - urrent year. Presently, 2011-12 is being used as base yea . Information about Prices: The retail prices of selected ite “ommodities should be collected from the region where the Btoup of selected person lives and makes the purchases, ns Index Numbers AQT(5) Weightage: ‘The importance of various iteing classes of people is different. ‘Therefore items should be given weight : importance. As discussed ¢z according weights for aig the se 8 0 their + are two accordin, ier, there () Quantity Weights: These weights are given in pro to the quantities consumed in the base period. ”°P tion ii) Expenditure Weights: These weights are proportion to the total expenditure on the items cong in the base period. med Biven Methods of Constructing Consumer Price index (cp) Corresponding to the two methods of assi different commodities, there are two methods 0 of Consumer's Price Index. Read the statement : ‘given below and iin {he Blank with the most appropriate answer, a ate (1) Aggregative Expenditure Method: This method is similarto Ning Weights yp of the construction \ggregative Expenditure Method, and Family Budget Method. Sen hekn peyre’s method (already ‘onge in pices pal by the / hod (already discussed). the households for goods anc services inthe Gent yearn comparison wth aoa FORMULA (cost of bingy Whoiesale price) Consumer Price Index (CPI) = — ‘Ans. Cost ving The following formula is used in this method. Pod where, p, = Price of the commodities in the current year Po = Price of the commodities in the base year: Thus, o = Quantity consumed in base year. Xp) qo Shows aggregate expenditure in the current yea ZXpodo shows aggregate expenditure in the base year Py, = Bie 0p (2) Family Budget Method: The following formul this method to find Gonsumer’s Price Index. FORMULA «100 la is used im ZRW Consumer's Price Index = “$y ape _ ive of various ite where, R = Current year’s price relative of v# W = Weights of various items. 428 statistics for Economics— jon of CPLby this method involves the following steps: alent a current year’s price (p)) of each commodity is divided i ne base year’s price (po) of the respective commodities by the fe resultant is multiplied by 100. These are called relatives of the current year, ‘therefore, ace Relatives of the Current year i Price of the Current Year Price of the Base Year x10 ee, R E x 100 i) Aggregate expenditure on each item is considered as the ee hrof the item, Hence, the weight (W) of a commodity jg calculated by multiplying the price (p,) of a commodity in the base year with the quantity (q,) of the commodity ‘consumed in the base year. "(ii The price relative (R) of each item is multiplied with their respective weights (W = pyqo)- These products are added to find SRW. " fix) The sum of weights SW or Ep qy is calculated. gl Polo (x) These values are substituted in the following formula to find the consumer's price index. Consumer Price Index _ Sum of Products of the Price relative with weights Sum of Weights RW Pu = Say the Consumer Price Index or the Cost of Living Index Number current year from the following data by (i) Aggregate feat ed Ceo) hod reed 80 per qt 5qt 24 per qu tq 16 per qt 20 per qt 2q 12 per qt 18 per qt Akg 5 per kg. 6.25 per ky 51 Apert 5 per! 40 metres Lper metre | 1.50 per metre 1oqt 2per qt 2.50 per qt Thouse 20 per house | _25 per h 429Solution: (i) Aggregative Expenditure Method ein forty Base Year on) 4 Wheat Pulses Ghee Oil Clothing Firewood House Rent From the given data we derive the following table: eat Aggregate Surrent Year Expenditure in Bas (Pp) ro) 16 24 20 20 40 20 Zoo = 280 Edo = 366 =Pi4 Index Number for Current Year = She «100 ren terre in Base Year co) Price in ee tg (Po) een) fotety rd ®,) (ii) Family Budget Method is ea enti Pxerenas (Value 00 = 366 109 = 130.71 280 eras od Ces a on = ee | Rice | 5 qe | Wheat | Iqr | Pulses 2qt | Ghee Akg | oit 3 | Clothing 40 metres | Firewood 10g House Rent | 1 house 20 25 135, ee =z [sw = 2 ERW_ _ 36,600 2 1) Now CPI for Gurrent Year = S50 = “359 430 statistics for Economics en Bn Pe Pro «awte the Cost of Living Index from the following data: re ee ar a Sn eect ceo hus ecu cd 25 1 25 qxiz Bkg x12 06 21x12 22 6 metres X12 10 12 months 20 per month | 30 per month Expenditure of 12 months | _10 per month | _15 per month ee ea bites Crh (CA) Cornea 7) ree uy () end Co eed Expenditure Pug Pitags od Expenditure in Ce ee cy 30 qt 360 750 | 36 kg 4 216 | 241 15 ae 36 52.8 | 72 metres 0.75 10 54 | 720 | 12 months 20 per month |30 per month} 240 | 360 12 months expenditure} 10 per month | 15 per month! 120 | 180 Pott x100 of Living Index = 5p 2,084.4 199 = 252 : = 344 2011 from the 22 based on Cost of Living Index for 20 data: Clothing} Fuel and “e s ee sees Ey 108 oe ae « indexNumbers 431i) Formulation of Price Policy. (i Wage Adjustment. (Gi) Measurement of Real Value, (iv)Analysis of Markets (w) National income Defiator \ 432 statistics for Economics eT Mii Food 128 Housing 140 10 Clothing 12 10 | Fuel and fight 116 6 Miscellaneous 106 42 ae ‘SW=100 Thus, Cost of Living Index = ae = bb Importance of the Consumer Price Index or Cost of Living Index (1) Formulation of Price Policy: The consumer price indices are used by government to frame policies on prices. On the basis of these indices government decides whether the prices are to be controlled, dual price policy should be adopted or public distribution system is to be introduced, etc. Also, government policies like rent control and taxation, general economic and fiscal policies etc. are framed on the basis of the consumer price index numbers to a large extent. (2) Wage Adjustment: Cost of living index numbers are used as basis for the wage adjustments. The rates of deames allowances are decided by the government on the basis of these indices. These indices are also used for wage contracts and wage agreements of the workers. (3) Measurement of Real Value: These index numbers are used to measure the real value of the rupee or its purchasing power and real income (or revenue), etc. (4) Analysis of Markets: The consumer price indices used for the analysis of the market of specific com for their demand and supply. rae, ‘ Iso used a8 (5) National Income Deflator: These indices are a a deflators of national income. Accordingly, real national income is estimated. are also modities Difficulties in the Construction of Consumer Price ‘There are many difficulties in the construction of consume index. These are as follows:nce in th lass Tiving standards. Thus, there cannot be one dex number for different classes of ‘es of consumers are different and therefore, price in societ)* F ? Mierence 38 Prices! ‘The price indices are constructed on Oe basis of retail Prices. But the retail prices vary from place to place and even. at the same place from shop to shop. As such it is very difficult to find a repress ntative price for the iculation of consumer price index. jp Difference in the Proportion of Expenditure: articular group do not spend on members of any P' f consumption in same ratio and even one person ‘items 0! does not spend on various ‘commodities in the same ratio at (GAA ro two different periods of time. A consumer's purchase ratio ia e, habits, etc. Accordingly, it is y Read the statement depends upon his/her tast difficult to construct a cost of living index that truly reflects af given betow and sat change in the cost of living over time. iether its tre or false: oA consistentrise othe potest price nde rer tne mes WHOLESALE PRICE INDEX (WPI) oeeton oration” tthe WPI) measures the relative dities traded in the wholesale e index numbers are 9011-12 is being used he Wholesale Price Index ( hanges in the prices of commo: “markets, In India, the wholesale pric | constructed on weekly basis. The year athe base year. , eightage of Wholesale Price Index lowing jodity Group and W Bis tndia, all che commodities have been classified in the fol erg Re ce ‘These include 117 commodities like Rice, Fruits, Pulses, Vegetables and Non-food articles like Coton, Jute, Metals, TPhese include 16 items like Coal, Petroleum Products, PG. Trincludes 564 items lik Sugar, Paper, Machinery, Che vers, Leathers et ¢ Standards of Living: Consumption pattern & Index Numbers 433eee Rene ea ene ku eo iii Ip case of consumer price index number. the basic purpose isto know cost of living of @ specified group of consumers in the society. Incase of wholesale index number, the basic purpose is to assess the situations of overall demand and supply in the economy. Rising pices indicate a situation of excess demand, while faling prioes suggest a situation 6f deficient demand Wholesale price index focuses on the rate of inflation in the economy. Asin many countries, in india also, efforts are afoot to shift from WPI (Wholesale Pace Index) to Producer Price index Producer-Price refers to the bssic price including taxes, trade margins and eport cost. Producer Price index is expected to offer better insights the anelysis of price nds in the country. 434 Statistics for Economics (2) @) Uses of Wholesale Price Index (1) Forecasting Demand and Supply: The wholesale indices are often used to forecast demand an situation in the economy. An increase in wholesah index is an indication of excess demand. It is a situ x which demand is greater than supply. On the othe decrease in wholesale price index implies deficient Ic is a situation in which demand is less than supply ation ji T hand, 4 demand, Estimation of Monetary Value and Real Value: The whole price index can be used to estimate the monetary value ang real value ofaggregateslike nationalincome and expendiun Monetary value is the value estimated at current year pricy Real value is the value estimated at base year prices or constant prices. The monetary aggregate can be converted into real aggregate by applying the following formula Real Aggregate of the Current Yeat = Monetary Aggregate of the Current Year _Price Index of Base Year “Price Index of Current Year Indicator of Rate of Inflation: The wholesale price indexis also applied to calculate the rate of inflation in a country It refers to the rate at which prices tend to increase over time. What is Rate of Inflation? Wholesale price index is prepared for every week. If for week, wholes price index is A, and for week 2, the wholesale price index 's A i the rate of inflation between week 1 and week 2 would be est under: A2~ A, A x10 Illustration. se If wholesale price index for week 1 = 200 and for week 2 = 250. 250 - 200 , 199 ao = 22. £100 = 25% 509 *100 Rate of inflation = Annual rate of inflation 1s estimated by considering wholesale price index for all weeks of the year average2 ee ee DUCTION at index. which : in the level of industrial jnacountry in comparison to the leve i nde we Py Chota gea nes eof production inthe 4 In India, the base year for the curn year INDEX NUMBER OF INDUSTRIAL pro 10. number of industrial production is qh * gsthe relative increase or decrease ENE series is 20] 1-12. index numbers tell us about the changes inane qu iuction. These index numbers are useful in estim: oP of industrial production in the economy, antum ating the Construction of Index Number of Industrial Production ion of the index number of “prolves the following steps: i) Classification of Industries: of industrial production the following groups: (i) Mining, (ji) Manufacturing, and (iii) Electricity, 2) Statistics or Data Related to Industrial Production: The data relating to the production of the above mentioned industries are collected either monthly, quarterly or yearly. G) Weightage: Weights are given on the basis of the relative importance of different industries. The weights are based on the values of net output of different industries, and their contribution to national income. In India, the following weightage is given to different groups at ‘present: industrial production ‘To construct index number industries are classified into ) Mining 2) Manufacturing 100.00 Index Number of Industrial Production is calculated by using wing formula: Hide, Mmber of Industrial Product i ae EW M®-4, ~ Level of production in the current year: 4, = Level of production in the base year Ww = Weight or relative importance of industrial output IndexNumbers 435 ,Whusteation Construct index number of following data cent — . es ae Morn | Manufacturing, 300 | Production | Electrical 400, | Products | Mining 87 Solution: From the given data we have . ronan Sree . ag ae mC x10) | ay co on Ch) Manufacturing = | laos | lee 300 7 * 100 = 245.90 85 20,901 59 3 | | Electrical | 10, | | Produce | 208 400 308 x 100 = 197 5 985.00 | | Mining | 65 87 87 100 = 134 10 Satie! =W = 100 Index Number of Industrial Production (approx.) 11. INFLATION AND INDEX NUMBERS Inflation refers toa situation of ris ein the general price levelin’ Cealtty over along period of time, Often, inflation is measureti® sams of wholesale price index, AVaciraser title in Die ai ri Pisce index over time implies aigintalieny ose atean: Example wholesale price index rises farnii OTR eO TES (base year) © in 2022, and ifthe increasein price has almost been consistel™ time (like, every year the Reneral price level has bee? 36 siousticsforéconomicswould be decmed as a situation of inflation. Implying a purest _ #10. erosion in the value of money or purchasing power of myalue of money (or purchasing power of money) reduces if wholesale price dex rises by 100%. Obviously, double level, half the purchasing power of a rupee. If money ‘ofthe people remains constant, 10% increase in the price mplies a 10% decrease in purchasing power of the people nflaion causes erosion of purchasing power of the people, if je money income remains constant. Accordingly, often we find tering the government for dearness allowance (DA) Fcompensate for the loss of purchasing power during periods in the Rate of Inflation snot imply Fall in the Price Level here must appreciate the distinction rate of inflation. Inflation is measured as a percentage in the general price level, like from 100 in 2021 to 115 . implying a 15% increase in the price level during the p of one year. While prices have tended to increase during year, these may not be rising at the same Pace (Or the same every week within the year. Relative change in the price from week to week measures the rate of inflation. between inflation where, A, = Wholesale price index for week 1,and A, = Wholesale Price index for week 2. Thus, within the year, rate of inflation may iiease or decrease. Tt only implies the increase or decrease in in the speed of inflation e of | . Rate of Inflation A» = At 100 A . : the pace of inflation or increase/decrease i |. To illustrate, in week 1 the rat 9, the rate of inflation may be be interpreted as a fall in the at which prices tend © Mot a fall in the price level | inflation may be 5% while in week 4%, Fall from 5% to 4% should not i i be. F Price level. 1t only implies a fall in the speed _ Wise. : nis treasured in terms of changes int! PHOS. ‘ 4 in the wholesale price index over a long period of time imi of purchasing power of money. ‘i of inflation, trade unions offen pester for hig! power of a 1upee: fhe wholesale price index. based on weekly quoratio shor money wages to compensate for the Index Numbers plies a situation of inflation. ft 437 eeSensex ste index showing changes in the Indlan stack market. Iisa short form of Bombay Stock, | ‘Sensitive Index: i is constructed with 1978-79 as the reference year or the base year, Chg, a ronan ance ate ea sane rf stock morket Risen ensex implies on overal increase in shore ries This sheen | suines fon necance RUPEE IS is Of the principg : in the economy. Human Development Index (HDI) HDI isa composite index developed by UN to asess th es performance of different countries in the area of gatthe economic development, Itisa composite index is based on different indicators of human ee are numerous indicators of human develop expectancy’, ‘adult literacy’, ‘po ‘access to improved water sources to improved sanitation’, HDI, as co the three basic indicators, as under. al ang »ASitS Construct velopment, There MEDE Such as ‘ie pulation below poverty line }come per capita’, and ‘accey, nstructed by UN, focuses on (1) Life Expectancy Life expectancy at birth is considered with a view to assessing long and healthy life of the people of a country, Higher the life expectancy, better the performance ofa country in terms of HDI ranking. (2) Education Devoid of education, human development becomes meaningles Itis education that promotes skill formation and adds to huma capital of the nation. Mean years of schooling is considered 35 is core parameter of HDI. Better performance of a country vil ank of regard to mean years of schooling places it on a higher rank HDL (3) Standard of Living Standard of living It reveals output territory and re: Income, better is is assessed in terms of Gross National pa created by a country both within its Gott st of the world, Higher the Gross } the HDI rank of the country. Le 438 statisics for Economics