mous OBJECTIVES a_ Introduction Calas 12, Meaning of Index Numbers 8 Weighted Index Numbers tna. Problemsin Construction of ‘8 Consumer Price index (CP!) \ frgex Numbers 11.9 Index of Industrial Production \ 11.10 Wholesale Price Index Numbers | Types of Index Numbers 11.11 Inflation and index Numbers, "4 Methods of Constructing 15 price Index Numbers 11.12 _ Uses of Index Numbers 116 Unweighted Index Numbers 11.13 Limitations of index Numbers \ or Simple Index Numbers poe oe 11.1 INTRODUCTION We are living in the fast changing economy. In dynamic economics, we see that there are continuous changes in the size of population, output, income, money supply, prices of commodities, etc + Changes in the economy hav and employment, general price level and so on. + Weknow that most values change terested in knowing the extent of changes, and weare int which have taken place in a particular period in comparison to the previous period. compare the average price level fe their own impact on the level of economic activities, income + For example, we may want to ¢ of different items of food in 2022-23 with what it was 0 2011-12. consumption, production, + Similarly, we may also be interested in comparing the changes in p x Fiving, national income, accidents, ‘business failures and exports, imports, cost of ee deetine many other phenomena. Such changes are studied with the help h we = Historically, it was Carli, an Italian Statistician, who constructed the firstindex number as early as to compare the prices of year 17 50 with that of year 1500. 11.1Statistics for Eco 11.2 MEANING OF INDEX NUMBERS |EANING OF INDEX 7 isa statistical device for measuring changes in the magnitude of ‘An index number is a statistical device f¢ : Sone mber shows by ts variation the changes in a magnitude veesottnmerh ara a as age ofa group of related variables: «+ Index numbers measure the changes with respect to time, geographical location oF song other characteristics. The comparison may be between categories suchas person, sha, hospitals etc + Te also measures the changes in the value of variables like prices of specified listo commodities, volume of production in different sectors of an industry, production f various agricultural crops, cost of living etc. Index numbers are known as'Barometer of Economic Activity’ as they are used to feel the pulse of the economy. Example for Better Understanding of index Numbers Let us consider prices of two commodities: Milk and Wheat for the year 2022-23 and compare it with reference to some previous year, say, 2011-12. In this case, 2022-23 will be referred as Current Year and 2011-12 as Base Year (Base Year is a period of time that is used as a basis for comparing changes in prices or quantities in a given period). + Absolute Change: Absolute change refers tothe simple difference inthe value over two periods in time. If price of Milk (per litre) has increased from & 25 in 2011-12 to & 50 in 2022-23, then it means that there is an absolute increase of & 25 per litre (= € 50 -€ 25). Similarly, inthe same period, if price of Wheat (per kg) has increased from € 14 to & 21, then there is an absolute increase of €7 per kg (= 21 —® 14), Wich sop + Relative Change: It expresses the absolute change asa percentage of the value ofthe indicator in 25 x 100} case of wheat. Relative change (rather increase) in price the earlier period. Now, the relative increase in price is 100% [- 50-25, s0| in case of 21-14 14 mika 0% of milk is more than that of wheat. When we talk in terms of Index Numbers, then we can say that index number for the year 2022-23 (taking 2011 as Base Year) for Milk is 200 (as price of milk has become 200% of what it was in 2011-12) and for wheat is 150 (as price of wheat has become 150% [Link] itwas in 2011-12) Important Points for Index Numbers jie. + Only Relative Change is Considered: As commodities have different units of measurement (like in our example, milk is measured in litres and wheat imkilograms), their absolute change in prices are not considered. So, in Index Num! ly percentage change in prices is considered because relative changes are pure nut and after expressing the change in percentage terms, the units of measurement relevance.t with trent naring ods int then 1 the san r in > of ice 4 index Numbers \ yet ' o cage ie considered Ie num fees have risen by 139 98 Sho 1 aeticer ik prices by 12% men sBO™ chan se ge ee has Been 8129 agp 20228 a anavefa prices oF al the goods and gon Ynious pea TRS only 5 Vices have tmtn then i mer ve sa "08 thats wet we of milk ard wheat, we will c “ I consicter avera “year is the reference date troy . 1m which ay seeps taken 2s the base yearn Inca, i “re yearmay be changed relent a bathe index. I base year is taken a songs vee Eh soit sugges thet Pree nceasod by vine 00-28 ros characteristics of Index Numbers ! rg eaures of Index Numbers are rex numbers are specialised averages: Averages i nd compare two OF more series. However, i eae wet pressed are different or ifthe series are composed of we tyges cannot be used t0 compare them, In such ¢ oe ge in series. ases, median or mode ca which vo or menses erent types of items, then i index numbers help us in a d in percent o 1 inex numbers are expressed in percentages: The changes in mag sa faclitates the comparisons of two or more index numbers in tied aiation weve, percentage sign (%) is never used. eo « indernambers measure the effect of changes in relation tome or place: inex numbers sed to compare changes which take place over periods of time, between locations, and in categories. forexample, cost of livin necity can be compared across two periods 4, Index Numbers measure the change not meant to study the changes in the effects .g may be different at two different places at the same time or cost oivingin of time, capable of direct measurement: Indexnumbersare of such factors which cannotbe measured diretly. For example, cost of living, volume of production in different sectors of the economy, economic activity, etc. Now, changes in cost of living of people are not capable of direct measurement. But, we can study relative changes in itby studying the variations in certain other factors connected to it. 2 PROBLEMS IN CONSTRUCTION OF INDEX NU "sr problems involved in construction of index m' ' Pupose of Index Numbers: There is no ‘All Purpos: Inde ‘Petite use or purpose. MBERS vumbers are: ix’, Every index has a timited andStatistics fr Econ, * So, first step in the construction of index aumbersis to carefully define and deci Purpose or objective of ts construction. For example, ifthe aim is to study impact change in prices on the purchasing power of people, then itis preferable to covet! Consumer Price Index. — * ewe fail to decide the purpose ofthe index, then t would lead to confusion, wat of time and money. % * For example, if we want to measure the changes in prices and we have coll of quantity consumption, then it is of no use. » Selection of Base Year: Under Index Numbers, comparisons tobe made between differen, time periods. For this, some point of reference is needed. This point of reference is ‘Bare ‘Year’. Base Year is a period of time that is used as a basis for comparing changes in prices quantities in a given period. + No matter what period of time is used as base period, the value of the index number for this period is always taken as 100. * The determination of base period primarily depends on the objective of index number, * Guidelines for selecting a Base Period: The following points may guide in selecting the base period: (i) The base period should be a normal one: The base period should be free from all sorts of abnormalities and irregular fluctuations like, wars, floods famines, earthquakes, economic booms and depressions, lockouts, labour strikes, etc, (ii) The difference between base year and current year should not be too large: Since index ‘numbers are helpful in decision making and economic policies are often a matter of short period, we should not select a base period that is too distant in the past. (iii) Availability of Statistical Data: Base year should be a year for which reliable statistical data is available so that comparison can be made. (io) Fixed Base or Chain Base: While selecting the base year, choice has to be made between fixed base and chain base. * In fixed base method, the period of comparison is kept fixed for all current years, while in chain base method, the changes in prices for any given yeat are compared with the prices in the preceding year, not with fixed year. * The selection depends on purpose of construction of index number. * However, the chain base method gives a better picture as compared to fixed base method as we have the latest data to be compared. . Selection of number of items or commodities: The number of items to be included in an index number should be determined by the purpose for which the index is constructed. Itis 1ot possible to include all the goods and services produced in the index number. The following points may be helpful in t p) The commodities selected should be representative of the people for whom the index is meant. For exampl price index, the retail prices of those commodities budget should be included. lected data cote wo’ GicS for Econ, ‘Omics ct hy impact of letoconeenct SION, Wastage collected data feen differeng ence is ‘Base S in prices op dex number 1ex number. in selecting ree from all is famines, rikes, ete. Since index ena matter in the past. ch reliable o be made all current siven year 1 year. er. d to fixed ded in an icted. Itis struction ities: istoms of onsumer a family on se total number of tems showy index Numbers 1 Md be neithy 19 9 2 thal (0 the number of yee f item, representative; and ,, ifitis too large, the inde then enol. cost and time. * Wil be more index nu, y te stendardiced o” graded com presenta bE Will nop @ Tatid comparisons. Modis sh “vba . 7 Ould be Wilinvo al We preater of sources of data: lectio# ‘a: The day 1 sa misleading. Therefore, 2 sotten » adequate, comparable and rep oS ot le and y that gorge, set quotations: Paces of many con nesentatve the data used ge 2 chan cally possible collect price quote vary fe ac places which are well known for wanna placed °° © Place o, selected for obtaining price quotation, a of that par ree rice quotations eat Commod a Should be aan fate «after selecting the source of price quota taken fom the reliable py unbiased price quotations, as and wheres sou 1 Methods of Price Quotations: There are onoeae =n (i) Money prices: In this, prices are Soke sugar @ 40 per kg. aged i Quantity prices: Quantity prices are quoted grams of sugar for one rupee. 4 Acdecision must also be made as to wheth a er the wholes required. The choice would depend upon the pectetten Me Pies x rel ros are « ifthe prices of certain commodities are controled by aga jdministered prices should be taken (not the Sheds abla etaiesehardee ts ket prices, which may be much higher) « Selection of the Average: median, geometric mean, etc., « Brom the practical point of view, erratic limitations. « Basically, a choice has to be made between arithmetic mean and geometric mean: » Arithmetic mean is the most simple ofall averages. But itisaffectedby heextreme items. » Theoretically speaking, Geometric mean is the best average as it att importance to smaller units and less importance to larger Hem $0, unduly affected by extreme v2 the observations: 1. Selection of appropriate weights: The term “evight’referstothe relat “s sentifically cexeine! * The weights tobe assigned to iter omitisceon y as importance of a ‘commodity varies from. consumer ich price rena Per nit of money. For examp example, 25 Different types of averages such as arithmetic mean, mode, ‘can be used in preparing index numbers. ‘median and mode are not suitable because oftheir aches more it is not Jues in tive portance of iifere*Statistes for Ee ‘nome, sgnts or value weights: the weights can be ether quanity WeIBHE 0 : se The wa gs ae appropante whe VA comedian ene & ghar APP guaries ed purchased neg fe an aes ant of the ious commodities are attached imy z » Va rpc Portree Yaa i, The 2. Explicit weights: ‘incase of explicit weights, 8, Selection of an appropriate formula: Various fo Pir constructing the index numbers like by the statistician: method, Bowley’s method, Fisher's method, etc ® However no single formula can besaid tobe appropriate for all types of index numbers, note 1 The choice of formula would depend not only on the Purpose of the index but also wnaexN some outward evidence orimportang. iy revised in order to reflect the current behaviour a an unweighted index number is constructed rmulae or methods have been devised Laspeyre’s method, Paasche's on the data available. 5 M 11.4 TYPES OF INDEX NUMBERS ‘There are various kinds of index numbers. These can be broadly classified into three categories: ‘The va rece index Numbers: Te pric index numbers measure the general changes in prices of group 10 of commodities between the current year and the base year. av » General Price Index is used to measure the value of money. thet + Ofall the index numbers, the price index numbers are the most important and are equa commonly employed in various economic and business contexts. ont Both «When percentage changes in prices are differen for different commodities then price index helps in representing these changes by a single numerical measure inde «A price index may be a ‘Wholesale Price Index’ ora ‘Retail Price Index’, depending on the type of prices used. (i) Wholesale Price Index Numbers: It reflects the general pice evel for a group of items taken as a whole, In India, itis the most popular price index used in the business industry and policy market. It acts as an indicator of the rate of inflation. (itis Tr \ P discussed in detail later in the chapter). (ii) Retail Price Index Numbers: It reflects the gener items including food, housing, clothing and so on. The “Consumer Price Index” isa special type of retail price index, whichis a primary measure of the cost ofliving ina country. (Consumer Price Index Numbers are discussed later in the chapte: 2. Quantity Index Numbers: The quantity or volume index numbers measure average cha quantities and enable us to compare changes in physical quantity of goods prod i * The level of physical output in an economy can be easily studi number. ral changes inthe retail price ofvariowsindex Numbers tes 1 FO a peconstructed b ies ycanbeconstuteay using 7 «te enmbe ca Be easly dona S™ploas, ached i Inyo the commonly weed from pana a or cons Por. + Some situral Production; (i) Tndeatity i dee ex Need thy, important index Numbers: Value index a Number of ambers ee 7 ice, - viene te base period. tumbers compare al eal Inde 9, veral var; wit ‘study of changes in the total valu he totat value of We ‘ties, etal sales OF PORTS oF inventories nee * Want fa can be made PPdUton, Y Value orim, (Por Taney a tI beh: ‘aViow — I of — = rexNumbers | const (Pies mera changes (tea tant Inde Tucted, ensure tween current eeu average change in ers een deviseq | pres ips to compare changer yates and rd, Pasvised Spabaseyeo” ‘of goods produce Panty | Paasche's _—- ord oman eee =? . saris ailbice ns, ees) Index Numbers lex but also ide! [ops OF CONSTRUCTING PRI ICE INDEX NUMBERS ng METH! categories: igus methods of constructing price index numb eee = ed or Simple Index Ni : ers can be grouped under eS ofa grou 1, Unweight P| jumbers; ive beck \ : ) weighted Index Numbers \ » ebsicelfference between the two is that under unweighted index numbers, allite | nt and are equal importance, while in weighted index numbers, weights are accorded iat arta ara tena sof ‘nthe relative importance. Jed to diferent tems depending i Prt 7 then price Both of these methods of constructing Leaner inde numbers are further classified as: | din; 5 : \ s { Simple Aggregative Method; aD fa Simple Average of Price Relatives \__Indet Numbers Method. ‘he different methods of constructing simple soe Weekes Wes rice index numbers are shown in the Aggregetl® pverogeot —Agregeve Neopet ajacent chart: Method PriceRelatves Wetted Felatves Method 116 UNWEIGHTED INDEX NUMBERS OR SIMPLE INDEX' NUMBERS , bers, each item 1s supposed to hhave the same we !nthe unweighted or simple index num! : opesly assigned to any item. So, all items are giv constructed by the following techniques: ‘ earl ‘Aggregative Method; f iple Average of Price Relatives Method. en same imporLet us discuss each technique one by one. ‘Simple Aggregative Method Statistics for Ee, ‘nomi ies This is the simplest method of constructing index numbers. In. this method, aggregate pri 7 all the selected commodities in the current year are expressed as a percentage of the lig Prices in the base year. ‘The steps in the construction of such an index are: ‘BBtegate (i) Add up the current year prices of various commodities and denote by Ep,. (ii) Add up the base year prices of various commodities Zp. (iti) Use the following formula: 2p, Po =2Pt x 100 =n Where, Po; = Index number of the current year. 2p, = Total of the current year’s price of all commodities. pp = Total of the base year’s price of all commodities. Example 1. Construct index numbers for 2022-23 taking 2011-12 as the base year from the following data by Simple Aggregate Method: Commodity Price in 2011-12 | Price in 2022-23 Wheat %20/kg 25/kg Rice %30/kg %40/kg Pulses %60/kg T80/kg Sugar %30/kg %40/kg Solution: Construction of Price Index Year 2011-12 as the base year Commodity Rice Pulses Sugar Price Index for year 2022-23 with year 2011-12 as base Po, = 2PL x 100 - x100= 132.14 The price index number (132.14) reveals that there is a 2022-23, compared to the prices in the year 2011-12. Ans. Price Index Number = 132.14, "Omics Icey. of Baty Index Numbers ‘ a he following are the twa vl oi to retail prices dur 6 eT mmodlty | ian —— se 9) & os gm) Emme simple aggregate ate Calcul yf we ‘Commodity | _ —— Fat ze) gato) prcndex for year 2022-23 with year 2011-12 a base 21 y 109 = 199 =>. =—— x100= Pot Spy ye2 * 100= 122.83 tne price index number (122.83) reveals that there isa netince 1002-23, compared to the prices in the year 2011-12, Ans. Price Index Number = 122.83 886 of 22.85% in pcesin th year fample3. Calculate the price index by first taking 2016 as base year and then 2018 as base year: year Pa) eo 2016 40Statistics for ©" Econom, of" oii oor (i co? 2017 50 22100 = 125 Fe x 100 = 40 60 83.33 so so ; x 100 = 150 100 = 2018 | so 100 3 100 = 100,09 oi 70 70 201! ——x 100 = 175 —~* 100 = 4 2019 | 70 2 G0% 100 11807 wae 202 £9 100 = 200 100 = + ete 6 0 cael oo Pn Naas Co 90 90 ge 100 = 225 100 = we [a a 60% 1 = 15000 ee 35 35 ae 202% x 100 = 297.5 x 100 = 1 ior 2 | 95 a" %0 58.33 solut Limitations of Simple Aggregative Method 1. Itis influenced by the magnitude of the prices. It means, higher the price of a commodity 8reater is its influence on the index number. * So, high priced commodities receive greater weightage than low * For example, if rice prices are relatively higher than thos: tend to influence this index relatively more than the prices of wheat. 2. Equal weights are assigned to every item in construction of this index. The relative \ importance of various commodities is not taken into account. * For example, items like pencil and milk are assigned equal importance in the construction of this index. Priced commodities, of wheat, then rice prices * This limitation renders the index of no practical utility. 3. Prices of various commodities may be quoted in differ rupees per litre or rupees per metre and so on. * Thus, the indexis influenced very much by the units in which commodities are quoted and accordingly some of the commodities may get more importance because they are quoted in a particular unit, simple Average of Price Relatives his index is an improvement over the simp y the unit in which prices are quoted. A 'e current year to price in the base year. te steps involved under this method are: () Calculate Price Relatives ofthe current year (Es 10} 0 in the base ii) Obtain the sum total of price relatives, ie. (@ x 10) : 0 rent units like rupees per quintal, le aggregative price index because itis not affected Price relative is the percentage ratio of the price in the price of each commodity in the current year by the priceIndex Numbers ~ (jo) Apply the formula: Po, . Construct an index for 2022-3 tak 7 ample 4. ‘ng 2011-12 as the base by the si ce tvs inctiod! *e by the simple average of = (Commodities: si 8 nee Es) ‘pices (2011-12) | 0 | 20 30 40 Prices 201" Dp 7 Prices (2022-23) 13 [_w7 60 70 Solution: Calculation of Price Index Number , Commodities Prices in 2011-12 (2) | Prices in 200228 Price Relatives (Po) ©) ‘ 47.5% in pri The price index number of 147.50 shows the increase of ‘compared to year 2011-12. Ans. Price Index Number = 147.50 the simple average of relatives method. STREETS. Commodities oe = 40 Prices (2011-12) 50 30 760 Prices (2022-23) 70Statistics For Econo es tives Method Price Index Nu Number by simple Average of Ri Solution: Bx 100 = 149 . 40 60 es = 180 7 80 400 12 100 = D 400 120 io" 100 = 120 7 20 20 2x10 100 P. Nes 2 (Beso es sexi Po = = ~ =. 127 “The price index numberof 127 shows the increase of 27% in prices in the year 2022-23 as compared toyear 2011-12. Ans. Price Index Number = 127. Merits of Simple Average of Price Relatives Method This index has the following advantages over the simple aggregative method: (i) The value of this index is not affected by the units in which prices of commodities are quoted. The price relatives are pure numbers and, therefore, are independent of the original units in which they are quoted. (ii) Equal importance is given to each commodity and extreme commodities do not influence the index number. Demerits of Simple Average of Price Relatives Method (i) As it is an unweighted index, each price relative is given equal importance in actual practice, a few price relatives are more important (ii) Difficulty is faced with regard to the selection of an approp 11.7 WEIGHTED INDEX NUMBERS We have noted that the index numbers discussed so far, gives eqi However, while constructing weighted index numbers, rational ¥ items or commodities in an explicit manner. Such weights indicate or commodities included in the calculation of an index. Rational Weights**: It is impossible to give a comprehensive definitio Weights, which are perfectly rational for one investigation, may be entiOmics, chapter 11° Index Numbers \bout the rational the decision 2! weights depend: : she concerned datay "On the Purpose ofthe index ny weighted index numbers can be constructed by ber and the nature of () Weighted Aggregative Method; ang? “© ™ethods: (i) Weighted Average of Price Relatives Method a weighted Aggregative Method ° _ Linder this method, weights are assigned to various it i prices, the weighted aggregate ofthe prices are obtained. "4 of fnding the simple area =a Some of the important methods of constructing Wei neva ; gate of 1. Laspeyre’s Method : BBTeBative Indices are: a | 2, Paasche’s Method « ental ! ieeworth Method | 3, Fisher's Ideal Method 7. Kellys nical = 10 | 4, Drobish and Bowley’s Method | However, considering the scope of syllabus of Class XI, we ~ weighted aggregated index numbers. will discuss theirs three methods ofconstructing | Laspeyre's Method | Mr. Laspeyre in 1871 gave an weighted aggregated index, quantities of the commodities in the base year. + Ithelps in answering the question that, if the expenditure in the base year on a basket of | commodities was ¥ 100, then, how much should be the expenditure in the current period on the same basket of commodities. + Formula: in which weights are represented by the 2P1do 2Podo * Steps: The various steps involved are: ares — 1. Multiply the current year prices (p,) by base year quantity weights (qa) and total all such products to get Zp;qo- Kibet wee 2. Similarly, multiply the base year prices (pg) by base year quantity Weights (4) and obtain the total to get 2poqo- s ‘ 3. Divide 3p,qo by Eppqo and multiply the quotient BY 100: This will be theindex | number of the current year. as sche's Method dL ee German statistician Paasche in 1874 constructed an index number, in which Welgh's az letermined by quantities in the given year. : * Ithelps in answering the question that, if the current veld bat Poy = x 100 of consumed in the base period and if we were spending ae how the expenditure in current period on the same basket of € * Formula: t Po, = 221% x 100 ee 2% ;Statistics for Eco ome, sus steps involved are: : «pT in yc eam en » Ma ct 2. Similarly, multiply the base ye obtain the total to get =pod- ; me 4. Divide p,q, by Zpoth and multiply the quotient by 100. This will be the inde, number of the current year. sar prices (Po) by current year quantities (q,), a sher’s Method : rea Irving Fisher has given a number of formulae for constructing index numbers and of ideal’ i f both Laspeyre’s and Paasche’, wne as the ‘ideal’ index. He combined the techniques of ere : Method and used both base year as well as current year quantities. The Fisher's Ideal Index ig given by the following formula: Po From the above formula, it is clear that Fisher's Ideal Index is the geometric mean of the Laspeyre and Paasche indices. 7 fee ce 1. The formula is based on geometric mean, which is considered to be the best average for constructing index numbers; 2, Itconsiders both base year and current year quantities as weights. So, itavoids the bias. associated with the Laspeyre's and Paasche’s indexes. 3, It satisfies both the Time Reversal Test and Factor Reversal Test: Ans * Time Reversal Test: This is a test to determine whether a given method will work. both ways in time, forward and backward. In other words, if we change base year to Examp current year and vice-versa, then the product of two indexes should be equal to unity. metho + Factor Reversal Test: This test requires that multiplying a price index and volume index of the same type should be equal to the proportionate change in the current values. In other words, product of a price index and the quantity index should b j equal to value index. ibe am consid ee apaiG 5k a a ‘xample 6. From the following data, calculate price index numbers for 2022-23 with 2011-12 as — base by: (i) Laspeyre’s Method, (ii) Paasche’s Method, (iii) Fisher’s Method. — Base Year (2011-12) Commodity Price (@) Quantiy Po Ea A 20 8 5 50 10 c 40 15 D a) 20pay ¢tndex Numbers wn ) fore And totay lt 50 Yoar (2017-12) ‘Price (9 | Quantity ti SQ) ang Po 40 2 be the index 10 15 20 20 nd oF these i Pa - 'aSche’s {__| al Index ig Gases Method om Po 070 = 22190. 100 1100 = Pos 2PM 1,660 100 = 124.69 (p Paasche's Method Laspey 2.04 1.780 re , 2B 5 100 = 2220. 400 = Pos Pot 1,470 100 = 121.7 (@ Fisher's Method a Eide ,, 20:91 Pos = 4) Sete x PHS x 100 e TY Epo 2PM i 2,070 , 1,790 4 x E - 2020, 1780, 00 = [751835 x 100 = tno ™ 1470 TETBGS x 100 = 1.2802 x 100 = 12322 ‘Ans. () Laspeyre's = 124.69; i) Paasche's = 121.77; i) Fishers = 123.22. Example 7. For the data given in the following table, compute index numbers by: (i) Laspeyre’s method, (i) Paasche’s method, (ii) Fisher's ideal method ae ree Current year Commodity Price (®) rn aoe — Po. Go. PL a 7 10 30 ro e 8 15 10 { = © 3 eS D 4 40 0 Construction of Price Index ‘Numbers: Solution: Commodity AStatistics for Econ ef [me 88 780 oY 6 40 80 c 6 | 20 Po! | = 4 Je EPo%0 | | =Pods =580 | =960 | pai (a | 7p Laepeyre’s Method : e “Pio y, 490 =—080-x 100 = 118.965 | Por = Spse0 580 (a Paasche's Method we 1 = Sood 960 (i Fisher's Method | 2PiB , 2% 5 400 2PGo — =Po 690, 1,150 = [2 < 2152, 100 = [74250 x 100 = 1.1937 x 100 = 119.37 580 * 960 ‘Ans. i) Laspeyre's = 118.965; (i) Paasche's = 119.79; (i) Fisher's = 119.97. Por Example 8. Calculate the price index number by: (i) Laspeyre’s method, (ii) Paasche’s method, (iii) Fisher's ideal method: Base Year (2011-12) ie | Commodity Price Value Bes @ (Total Expenditure) | _ A 2 200 B 8 72 40 100 c 12 60. 15 90 D Z 49 40 80 Solution: In case of both the years, total value is given. So, we will have to first calculate the quantity by applying the following formula: \ Quantity = Yate. 2 Construction of Price Index Numbers Base Year (2011-12) Price (9) | Quantity Po. 9% A 2 100 B 8 9 c 12 5 D 7 7index Numbers Statistics for Eeg, $88 5 100 381 = t4049 570 BpIBs x 100 = STEX 100 = 159.79 0” o% method 8 Forde, 2% x 199 = [835579 a Epo 381 40g * 190 = 140.05 sens = 140420 Pate 12070 6) = 140.05, 4, On the basis of the following information, cle te Fisher's index A 8 asche’s method, c D aa a | E a A Sui Construction of Price index Numbers 300 7 - Base Year Current Year| 100 sy| Price (2) | Quantity | Price(®) | Quantity 90 Po 9 Ps % 20 7 6 50 10 | 66 7 2 100 2 120 by applying c 4 60 6 60 0 10 30 12 7 E 8 40 12 i Foshers Index Number 4s. Fishers index Number = 139.74einen ue is the product of price and q Value indox numbers are very easy to calculate. Volts ty Yue alae rate equal tothe value ofthe CUTE vided by the value of the base. year. If this ratio is multiplied by 100, we got the value index r9, Vis the value index number Symbolically: V = Be x 100; Wher 00 : , ‘Such index numbers are not weighted as they do not conakder' ae i aa quantity. These index numbers are however not very popular, because the situa! by price and quantities are not fully revealed by the values: Weighted Average of Price Relatives Method In this method, the price relatives for the current YEO" year prices. These price relatives are multiplied by the products are added up and divided by the sum of weights. the weighted arithmetic mean of price relatives. Steps: are calculated on the basis of the base respective weights of the items, These In other words, index number ig 1. Calculate price relatives for the current year ( x 100) and denote itby R; 0 2. Multiply the price in the base year (po) with ‘weights (qq) to get value weights and denote it by W; 3. Multiply the price relatives (R) with value weights (W) of each commodity and obtain its total to get SRW; 4, Obtain the sum total of value weights to get 2W; ZRW 5, Apply the formula: Poy = 77- pply the formula: Po = “Sy Example 10. Calculate the index number by weighted relatives method from the following data for the year 2022-23 with 2011-12 as the base year. Commodity Weights Price in 2019-12 Price in 2022-25 (@) A 80 5 8 8 65 8 14 c 42 12 18 D 37 4 5 E 3t 4 5 F 15 2 4 Construction of Weighted Index Numbers Commodity | Weights | Price (®) Price (| Value Weights % 2011-12 2022-28 (090) Po Py See Wane A 80 ——-. 5 8 400 8 14 520and quant ee and ‘quantity, sled by price basis of the base yea 2 the items. Th ‘Quantity or Volume Index Numb index num iber is psdscussed earlier, quanti index number mea us to compare changes in the sures the average cctsenran eres he ran oases ees index ru index numbers. a aon meen wacyon oes —____|__ Price index Numbers] hts.a ‘Nuribers | Guana pdar ass hts and denote ‘ganple Aggregative | Ps, See Quantity Index Numbers 1 = 35% Fay ‘and obtain its 2 [sung 00 ollowing data 118 CONSUMER PRICE INDEX (CPI) 4 i Meaning eee Consumer Price Index reflects the average increase in the cost of the commodities consumed —— by the specific class of people so that they can maintain the same standard of living in the aa current year as in the base year. we « They are designed to measure effects of change in prices ofa basket of goods and sevice onpurchasing power of a particular: section of the society duringany ve" (current) peti with respect to some fixed (base) period. * The cons ‘umbers are also known as: . sumer price index ni Wa} Pie of Living ISX Numbers. \ () Cost of Living Index Numbers) (ii) Retail Price Index Numbers; oFStU Fo eonong Need for Consumer Price index arises because general index nun, index numbers cau Tmmodities consumed by duper iter, “The need for constructing consumer price lo not highlight the effect of rise or fallin prices of various co classes of people on thelr cost of living. Moncove diferent leases of people consume arent types of ormmeaies aleve same typeof commodity ie not consumed in thesame PFOPOTHON PY CATA WN of g . Soconcemer price dex runners ape onstrated separtcly for arent TAS OF PPE Lo study y, r ‘ffect of rise or fall in prices of different types of commodities mere ia “The consumption patter of rich, poor and Tidal & cles pole vis wie Ao consumption habits ofthe pepe Fe sane on ces rompicela te Fr ean the patter of expenditure of @ pe0n Iving in ‘rom that of another Pe ig ir sy, Race, Te coneuatPriow SE NT in determining ect : Ferrand fl i prices op efron cess of oopataTice tna areas. Coma Construction of Consumer Price Index The steps involved in construction of consumer Prieé index are; / 1. Determining the scope and coverage ofthe Index: The first step is to decide the particular class of people, for whom the index numbers is intended, such as industrial workers, government employees, low income or middle income class people, ete. » Inaddition tothe class of people, the coverage should also be clearly earmarked, i¢, the geographical area ~ rural or urban, city oF town etc « Itisnecessary that the selected class should form a homogenous group of people from the point of view of income and habits. ry: The next step isto conduct a family budget enquiry by randomly 2, Family Budget Enquil er of representative families from the class of people, selecting a sample of adequate num! for whom the index is designed. «The enquiry should be conducted in a normal period of economic stability. + Family budget enquiry helps in finding out how much an average family of this group spends on different items of consumption. * Commodities are broadly classified into following 5 major groups: (i) Food, (i) Clothing, (iii) Fuel and Lighting, (iv) House Rent, and (v) Miscellaneous. Exh of these major groups are further sub-divided into smaller groups termed 8 neous For instance, the group ‘Food’ may be sub-divided into cereals, pulses, oN and milk products, fruits, vegetables, etc. fiscellaneous’ i ; ' communication, includes items like household goods and services, transport and \ recreation and amusement, education, personal care and effects.Statistics for Ec general index consumed by aime “A by different rodities and eve rentclasses of pan of people to staan dy the idely. Also, the o. For example, that of another ng the effect of as. ecide the particular industrial workers, te. J rly earmarked, ie. sup of people from yuiry by randomly he class of people, stability. mily of this group roups: (i) Food, llaneous. sroups termed 25 0 cereals, pulses, transport and that the commodities included so Benes : ining PCE uotations: The ‘only those ¢¢ opts 1 third an¢ index munbe ee 5, obi a very importantand difficult wae the last amber. which, we ace shop t shop and even custo a sae pot be one formula for collecting te ciple may be observed: : eons that etal prices vary er. ay from place prin tea es bat {The retail prices should relatos fi Stil the folowing broad be pete by eal pede co Ret pe Should be those tear een each iter the quality (*) iscount for cash pa are actualy (8) Daou or ah yment and interest ater pope ee ek for payment shouldbe takes ju) Ina period of rationing or taken nto Go) Ina pene ipoul be ake in ccount slong 8 a caatite cnc ae eee «since pices form the mostimportan compo long withthe controled prices. Sinton as tobe paid tothe method entof costo living indices, cont sof price collection and ae tothe price calleion cc tbe weighted: The need for weighting arises because veatioriprt eats the cost of living indexis always a weighted index. oe Jal agents of trough maled question thoy vit the eal cts ard cae te ross galected and trained and sou be gver ‘fications otters tobe prices verified? ‘The prices can be verified by methods lke ‘check pricing’ or Pt + Under ‘check pricing: Pree quotations ae vetieg Mean by different agents. «+ Incase of purchase ol Peet aisekeel prices are covsctad usual PY speci eases through published Pics lists. special them, However, these ager ‘a manual of instructions 1\ as manual of sPe rin some wrehase checking'- of duplicate prices checking, actual PUrnase® of goods are made bifculties in Construction of Consumer Price Index ees 1, Prices used in the constructionof cost of living) > toshop, place to pl and consumer such prices cannotStats for Economy, Pie ferent commodities at different point of ime and by va ey 3, Theratioof expenditures on dif ne ee ime, which creates difficulties in living in 30 persons 8 not sme hi en si Ths, thre wil be variety of cot of ving indices depending upon region, group, community et ee lethods of Constructing CPI nl Metetrtenstng sexing wo mee ge () Aggregate Expenditure Method ot Weighted Aggregate Method; = ‘ erage of Price Relatives, ii) Family Budget Method or Method of Weighted Average of 4 i) Family Budget Me es as ‘Aggregate Expenditure Met se This method s similar to the Laspeye's method of constructing weighted index. To apply this method, the quantities of commodities consumed by the particular group in the base year are estimate Sontior and these figures are used as weights. Then, the total expenditure on each commodity for each ‘year (base and current) are calculated. Z The steps involved in this method are: 1. Multiply prices of the base year (po) with quantities of the base year (qq) and add it to got Pas) aggregate expenditure for the base year (Zp)qo); 2 2. Multiply prices of the current year (p;) with quantities of the base year (q,) and ada it tp — obtain aggregate expenditure of the current year (Sp; 4a); oe 3. Divide aggregate current year’s expenditure (2p,qq) by aggregate expenditure of base year = (pega) and multiply it by 100 to get consumer price index number. a 4. Apply the formula: Consumer Price Index = ay x 100 _ 00 Family Budget Method In this method, the family budgets of a large number of people, for whom the indexis meant, are carefully studied. Then, the aggregate expenditure of an average family on various commodities is estimated. These values constitute the weights. The steps involved in this method are: = 1. Calculate price relatives for the current year (Gs x 10) and denote it by R; 0 2. Multiplying the price in the base year (po) with quantity in the base year (qo) to calculate the weight of a commodity, ie. to get W; 3. Multiply the price relatives (R) with weight (W) of each commodity and obtain its total to - get ERW; 4. Obtain the sum total of weights to get 2 5. Apply the formula: Consumer Price Index = 2W. =W ‘methods of constructing consumer price index numb It should be noted that aforesaid both the Provide the same results.Statistics fy Econ ‘omnes oftime and by vay fost of living ots lex P Community ete methods: ‘latives, SPY this methog yenrare ear moa at jand add it to got Go) and add it to ture of base year exis meant, are s commodities ) to calculate in its total to 41. Calculate cost of livin udget Method. ‘e Index Numbers B index, fo *f0F the followin, itieelaeers '29°°9at0 Expenditure Method Prices (in ® Quant oc mie | mae > al set | on ae - 10 18 = —s fs = 4 20 24 a 7 =e 1 FD oS es — 7 12 ae 2 | —s * . — ima: : =e | pga9= 782 | Epy99= 1,071 consumer Price Index for the year 2022-23 1,071 Saas x 100 = 195.22 Pet ue aa Family Budget Prices (in rice i 4 Py td aay | aorvse | rmee.| Fixe janie) mie |) Po Py peberdone* ot 58 bs b “oo | 8 To 2.00 A 2 72 150. 8 a 2 120. ; 2 40 ; 18 20 ; 12 18 E 7 10consumer Pree index (OF {or the yoar 2022-23 mor Price indox (OF) 22-28 | ‘SAW _ 107.100 = 195.22 ‘Statistics fore onOMieg year 2022-28 as compared to year 2011-12 | 2 Bete Te oras.22% In prices the sontmanont nt ypu 82 ee the index number using: (@) Aggregate Expenditure Method, (ii) Famity Example 12, Comping year 2022-23 with 2011-12 as the base Yoo", from the data given belyy, ad eee cana tnunia) 2017 T2| Pride (9 2017-12 Price (2) 2002.35 oO 8 12 6 750 5 525 La 15 9 Sol ‘Aggregate Expenditure Method Solution: pease Prices (@) Quantity (units) Aggregate Expenditure Commodity | 2011-12 2022-23 2011-12 ie Pi Gort Podlo _Pido | - Po 7 700 800 4,200 A : 7 25 150 187.50 2— : sas 10 50 52.50 3} —8 as 20 960 1,040 ee 76.50 25 375 412.50 et 7 7 30. 270 810 | Epo = 2,605 | Epa = 3,702.50 ‘Consumer Price Index for the year 2022-23 = 221M 5. 499 = 3:70.80, 409 = 1.4213 x 100 = 142.13 pode 2,605 Family Budget Method a Prices (in ®) ‘Price Relatives | Quantity P, Commoaity | 2011-12 | 2022-23 B x 100 2011-12 Podo Po Ps A 9% Ww EM, A 8 12 150.00 100 800 4,20,000 B 7.50 125.00 25 150 18,750 c 5 5.25 105.00 10 50 5,250 = | a = @ 108.33 20 960 4,03,996.80 110.00 25 375 F 9 27 300.00 30 270tno year 2022-23 Statistics 10" Economies reurnar Price Inox (cp) fort “re commer 7.100 = 19522 7 20 ! aw 7” 782 1.95 22%in pices inthe your 2022-28 8 compared to Year201 1.12 ‘ane sree tnat thro anineronse of iy Budgot Method = 105:22 a ‘Ans. oP! by Aggregate EXPEN! fo te Expenditure Method, use® index number using: () Aggregate Exp Gi) Famity 0 Example 12, Compute Lhe ng 93 with 2011-12 as the base year from the data given below, gree Budget Method, for the Yoo" Price (9 2017-12 Price (9.200223 ; @ 12 at 6 790 5 soe 525 oo oe ae mis 3- 15 16.50 @ 27 “Aggregate Expenditure Method Press ‘Quantity (i) ‘Aggregate Expenditure Commodity | 2011-12 2022-28 2011-1 ie Ps 4 Poa Pid 7 | 3 12 |__100 ‘800 1,200 4 t 3 a I 25 450 187.50 sep 5.25 10 50 52.50 —r 8 52 20 960 1,040 “Le | 15 16.50 25 375 412.50 —s_ I 9 a7 30 270 810 1 Epo = 2,605 | Epyao = 3,702.50 Consumer Price Index for the year 2022-23 = P10. 499 = 370250, 409 = 1.4213 x 100 = 142.13 Pod 2,605 Family Budget Method Prices (in®) Price Relatives | Quantity Ble P, Bor aoicel Commodity | 2011-12 | 2022-23 Be 100 2011-12 Podo 0 Po Pr AR Qo Ww. RW. A 8 12 150.00 100 800 1,20,000 B 6 7.50 125.00 25 150 18,750 c 5.25 105.00 10 50 5,250 D 48 52 108.33 20 960 1,03,996.80 e | 6 16.50 110.00 25 375 Z Fis) 8 27 300.00 30 270 zi l EW = 2,605 =3,«Index Numbers yer! "Economie ramet PICBIMEETOT IB 00" 2022.05. ERW 9g = 370,246 69 apsumer price Index number of 4 BeOS 1 D Bsaoescomoares to year 2011-12, “19 shows the ce a is 2 PI BY AGOFEDRTE EXPO and Famjy py 880 Of 42.1055 jn ia 190M inthe Re 1 consumer Price Index (CPD) Numi, ethod = 142.19, Year ‘ami fr consumer price j below importance of he s Price index can be ee 1, consumer price index numbers help in wap. OM the foll ay + ce policy, Tent control, taxation and ince, Regotiations, a Points; er, The government and business units use the cq nm Policy formulae: 38 Policy, jess Allowance (DA) the consumer pring 2 mulation, — the Dearni ) OF grant of bone ene PFCe index numery = them for increased cost of living due to price neqe te ™PIOVERS in order es eeuate —_ ‘he CPLis used to measure purchasing poiserteae ‘© compensate a ower of the rupees the value ofa rupee ina given ne mpees. The — formula for calculating the purchasing Power of. therupe 88 compared to a base year, The ee is: — Purchasing Power = 1 ta. — Consumer Price index * 1° Itindicates that money purchasing power is the reci math reciprocal i. : — if the consumer price index for a given year is 140 of the price index. Accordingly, 140, then purchasing power of a rupee is 1 7 —_x 100 = 0.71 . Thatis, the i et js 71 a at is, the purchasing power ofa rupee in the given year is 1 paise as compared to the base year. 7 4, With the increase in prices, the amount of goods and services which money wages can buy ~ (or the real wages) goes on decreasing. Index numbers tell us the change in real wages. : Real wages can also be determined, in the following manner: Money Wages ‘Consumer Price Index 5. Consumer price index numbers are also used for analysing markets for particular kinds of goods and services for their demand and supply. 6. CPlis also used as National Income Deflator in order to estim: Real Wages = moe ate real change in national income. Glculation of Real Wages 200 and the Example 13. During a certain period, the cost of living index 608 NP agi an dally wages of a worker was also raised from € 80 to 125. Has & ifs0, by how much in real terms. » ; Solution: 1s of the worker should be 4 With increase in cost of fving index rom 11010200, the daly 829 noo the worker has rot 80200 one up only 108 125: HARES SS = 3145.45. However, the daily wages ave 9 | aaa 110my Statststorty, WT Foro 1251 gain. infact nis el wages nave ge [Link] ral wage ofthe woreris SESS TIO ms compared to® 80 botore the price rise All India Consumer Price Index Numbers In India, three Consumer Price Index Numbers (CPI’s) are constructed: 1. CPI for Industrial Workers with 2016 as base year. It is published by Labour Burea, 2. CPlfor urban non-manual employees with 1984-85 as base year. Its also published by t Bureau. Dour 3. CPlfor agricultural labourers with 1986-87 as base year. Its published by Central Stati Organisation (now known as National Statistics Office (NSO)}. tical They are routinely calculated every month to analyse the impact of changes in the n 2 etal pricy on the cost of living of these three broad categories of consumers. All India Consumer Price Index Numbers are given in Table 11.1: Teble 11.1: All India Consumer Price Index Numbers ran “Industrial workers ‘Agricultural labourers ural labourers (1982 = 100 and 2001 = 100) (1986-87 = 100) (1986-87 = 00) General General ‘Conal ae 3 4 5 —= tl 33 27 a 342 256 256 366 264 266 414 293 294 428 : 306 307 444 305 207 463 | 309 311 482 319 321 500 | 331 333 520 340 342 542 353 355 125 380 382 133 409 409 153 145 450 451 176 163 513 513 194 180 564 564 f 206 195 61 6i1 673rea, 9019-20 _}_S3s rene | ppst 1 bour = peonomic Survey 2021-2088 s tatisticg) "9 DEKOF INDUSTRIAL PROD) 2 bers of ndustal sey industrial production UCTION on have “fail pri iber sd ui leasuy fai min india, Index of Industrial Prod, the Leal of gt SO The nde j ice ) | various index number of industri (NSO eae} Cereal Sais tial prod With the best Sista Organ luction se year of my eeton 12 = a government organisations in India, Ou Ae construc face ee Y Government a and non- of Industrial Production in the area of manuf : ctu total volume of industrial on nnB 2A Ui, | « During a given period, there may be usb producto Peucton in the output of other industries et MeO \ « Index numbers of industrial production a des tholovel of industrial production in a given peed eg en eee desea ji iod, compared to some « This index is a quantity index and not avalue index tena estas base period in the quantity of production and notin the value of ae measures changes + Generally, data of industrial production are collected under the following heads: 1. Mining Industries — Coal, iron ore, copper, aluminium, petroleum, ec. ‘Metallurgical Industries — Iron and steel, rolling mils te. “Mechanical Industries — Locomotives, ships, aeroplanes, ee len, Jute, silk tc. — Sugar, match, tobacco, breweries, et. 2 3. 4. Textile Industries —' Cotton, wor 5. Industries subject fo excise duties 6. Miscellaneous — Cement, glass, soap, chemical portance Inndia, following weigh's « Industries are assigned weights as per their relatively __are assigned to different industi po Te 2 Wandesing SS«The data relating to the Pro monthly, quarterly oF yearly «The steps involved in this () Take base year’s prod percentage of base year’s production, i (ii) Multiply these z (2 100) w. qo (iii) Apply the formula: Index Number of Industrial Production Example 14, From the following d: method are: ‘ction (qy) #8 100 and express current year’s prod: juction (qq) 28 100 and exp? year's production(g 44, .calculate (S. 100) cn Statistics for Economie, diction ofthe above mentioned industries are collected gy. fata, construct index of industrial production. percentages by the relative weights (W) and obtain its total to gee ‘Output (in units ae SE meen eee Mineral Production 125 190 35 ‘Chemical Production 80 140 40 Electrical Products 170 272 40 Textile | 220 308 15 Solution: Calculation of Index of Industrial Production E [ Output (in units) Weights Industry zort-12 | 2022-23 w a Ta, % a 1 |laox 10) w Mineral Production 125 190 35 152 5,320 Chemical Production 80 440 40 175 7,000 Electrical Products 170 272 40 160 41,600 Textile 220 308 15 140 2,100 EW = 100 16,020 Index Number of Industrial Production Industrial production has increased by 60,20% in year 2022-23 Ans. Index of Industrial Production = 160.20 z (= x 10) w % 16,020 =w 100Index Number yor? % oot jo WHOLESALE PRICEINDEX wy . 110 ge prides mumbers are those let Pes of goods in a country, dex vst ntry, umber ah ndexis restricted to commod) he tice, edible oils, minerals are collect Std eth, MBERS reduction 7 ics wh (asa shea WS Which remain inotesale price index numbers alsa a ay lished by The Office of the Bante ind Feo an aleator of the first wien ovs Tee tahB in economy, os st wl Miia omy soi7. Tre atest wholesale price index nummer nals PAC index mung _ jrswidely used in business and indvepy oo index number ro Indus, Jn indicator of inflation rate in the fice and by the ompiled in omy, ‘of Commodities for Wholesale Price inde the commodities traded on wholesaler its total to gop Gr0uPs jnindiay soergS mary Articles: It includ — cludes those goods, wi resources as: (i) Food articles like wheat, me ie are obtained by explting natural aicles like cotton, jute, raw cotton, minerals, etc 8, ruts, vegetables, et. (i) Now Food ‘ssi are broadly lassie nt followin th asis are broay ly ck to following 4. Energy Articles: In this category, goods like power, coal, petrle coal, petroleum products, and fuel are included. aay 4, Manufactured Articles: It includes manufactured goods ike wetpinery and equipment, paper and pape produc, later nes pres themicals, fertilizers, ete. Manufactured products have nearly two: shed eraoee cto importance || Weights to Different Categories (Base Yer 2011-12) ayes ee Sanaa ESE ATT Manufactured Articles ae ard = ies en Source: The Office of the Economic Adviser, Tinsry of Commerce and indus, EronaieSuvey 21-22 2,100 _ Utility of Wholesale Price Index Number _ _16,020_ Theuutility or uses of wholesale price index number will become clea fromthe one : ri 1 Indicator of Inflation: Inflation ia persistent ad are ren ee at sr is icator of ther Er index is taken as an indi oer economics, wholesale price indicates the rate at which the purchasing * An increase in WPI decreasing. aston iil * WPI number helps in finding out the rate of inflation eae calculated as: