Food For Thought

To be in the 1%
You have to do what
99% won’t

You get what you

FOCUS on.
So FOCUS on what you
want!
CA VINOD REDDY
359
Food For Thought

True Humility is staying

teachable,
Regardless of how much
you already know...
Believe you Can....
& You are
Half Way
There

Ca Vinod Reddy

If You Focus on HURT,

you will continue to suffer,
if you focus on LESSON,
You will continue to GROW! 360
Index
Numbers
BASE YEAR

CURRENT YEAR

CA VINOD REDDY
361
Index Numbers

1 Often we encounter news of price rise, GDP growth, production growth, etc. It is important
for student of chartered accountancy to learn techniques of measuring growth / rise or decline
of various economic & business data and reporting it with the help of index numbers.

2 Definition of Index Numbers :

1. Index number is ratio or avg of ratios of prices, quantities, values where 2 or more time periods
are involved, one of which is the base period.
2. The value at base time period serves as standard point for comparison.
Examples : Sensex, CII, HDI, CPI, etc.

3 There are 2 broad types of index numbers

a.
b.
Simple index number is computed for one variable where as composite index number is calculated
from 2 or more variables. Most index numbers are composite in nature.

4 All index Numbers are UNIT FREE.

5 Issues involved in the construction of index numbers

a. Selection of data.
b. Base period.
c. Selection of weights.
d. Use of averages
e. Choice of variable
f. Selection of formula

6 Price Relative = _______________________________________________________________

______________________________________________________________________________
Quantity Relative =______________________________________________________________
______________________________________________________________________________
Value Relative = ________________________________________________________________
______________________________________________________________________________

My Notes

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362
Index Numbers

7
Year Price of Quantity of Value of Relatives
(B.Year) commodity commodity commodity
2016 A A A Price Qty. Value
2016 50 8
2017 103 13
2018 68 16
2019 98 21
2020 111 28
2021 125 35

8 Simple Aggregative =
Price Index Number

Simple Aggregative
Quantity Index Number =

Simple Aggregative =
Value Index Number

9
Commodities Year
2021 2022 2023
Cheese (per 10 gms) 12 15 16.80
Egg (per piece) 3 3.60 3.30
Potato ( per kg) 5 6.00 5.70
Aggregate 20
Simple Aggregative
Price Index Number

Commodities Year
2021 2022 2023
Cheese (per 100 gms)
Egg (per dozen)
Potato ( per 20 kg)
Aggregate
Simple Aggregative
Price Index Number

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363
Index Numbers

9 Observations from above two tables :

__________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
________________________________________________________________________________

10 Simple Aggregative Index Numbers do not satisfy unit test

To overcome this limitation of simple aggregative index number we have introduced

________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
________________________________________________________________________________________
_______________________________________________________________________________________
____________________________________________________________________________________
_______________________________________________________________________________

11 Weighted Aggregative Index Numbers :

While finding weighted aggregative price index numbers we use weight as :
________________________________________________________________________________________

While finding weighted aggregative quantity index numbers we use weight as :

__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
_________________________________________________________________________________________
_________________________________________________________________________________________
________________________________________________________________________________________
______________________________________________________________________________________
___________________________________________________________________________________
_______________________________________________________________________________

CA Vinod Reddy - [email protected]

364
Index Numbers

12
Weighted Aggregative Quantity
Price
Index Numbers

1. Laspeyre’s

2. Paasche’s

3. Marshall Edgeworth’s

4. Fisher’s Ideal Indices

13 (Link relative of Current Year x Chain Index of Previous Year)

Chain Index =
100

My Notes

CA Vinod Reddy - [email protected]

365
Index Numbers

14 Year Price Link Relatives Chain Indices

2011 50

2012 60

2013 62

2014 65

2015 70

2016 78

2017 82

2018 84

2019 88

2020 90

2021 103

2022 108

15 Limitations of Index Numbers :

1. Indices are collected mostly from samples.
2. They depict only broad trend and not real picture
3. There are many methods employed from constructing index numbers, the result gives diff
values and this at times creates confusion.

16
Wholesale Price GNP at current
Year Index Prices Real GNP

2021 113.10 7499

2022 116.30 7935
2023 121.20 8657
2024 127.70 9323
Current Value
Deflated Value =
Price Index of current year
My Notes

CA Vinod Reddy - [email protected]

366
Index Numbers

Original Price Index

17 Year Shifted Price Index to the base 2020

2010 100

2011 104

2012 106

2013 107

2014 110

2015 112

2016 115

2017 117

2018 125

2019 131

2020 140

2021 147

Original Price Index

Shifted Price Index = x 100
Price Index of the year on which base has to be shifted

18 Tests of Adequacy : a. ______________________________________________________

b. ______________________________________________________
c. ______________________________________________________
d. ______________________________________________________

19 When unit test of index numbers is said to be satisfied?

My Notes

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367
Index Numbers

20 When time reversal test is said to be satisfied?

__________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
________________________________________________________________________________________
- You will notice that Laspeyre’s & Paasche’s method do not satisfy Time-reversal test but Fisher’s
formula satisfy Time-reversal test.
- While selecting an appropriate index formula, the time reversal test and factor reversal test are
considered necessary in testing the consistency.

21 When factor reversal test is said to be satisfied?

Fisher’s formula satisfy time reversal test as well as factor reversal test.
Therefore, it is called as ideal index number.

22 When circular test of index numbers is said to be satisfied?

_________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
____________________________________________________________________

23 A series of numerical figures which show the relative position is called as

__________________ .

24 Index number for the base period is always taken as

a. 200 b. 50 c. 150 d. 100

My Notes

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368
Index Numbers

25 ___________ play very important part in construction of index numbers.

a. Weights b. Classes c. Estimations d. Students

26 _______________ is particulars suitable for construction of index numbers.

a. AM b. GM c. HM d. None of these

27 Index number show _______________ changes rather than absolute amounts of change.
a. Relative b. Percentage c. Major d. Minor

28 The _____________ makes index numbers time reversible

a. AM b. GM c. HM d. Mode

29 The _____________ of group indices gives General Index.

a. AM b. GM c. HM d. None of these

30 _____________ Test is extension to time reversal test.

a. Factor Reversal Test b. Circular Test c. Both d. None

31 Factor Reversal Test is satisfied by :

a. Fisher’s Index b. Laspeyre’s Index c. Paasche’s Index d. None of these

32 Laspeyre’s formula does not satisfy :

a. Factor Reversal Test b. Time Reversal Test c. Circular Test d. All of these

33 The value at _____________ time period serves as standard point for comparison
a. Base b. High c. My d. Past

34 Index numbers are often constructed from _________________

a. Frequency b. Class c. Sample d. Temple

35 The ratio of price of a single commodity in a given period to its price in the base year
is called as
a. Price Relative b. Close Relative
c. Cousin d. Price

36 Sum of prices of all commodities

x 100 = ?
Sum of prices of all commodities in base year
a. Price Relative b. Quantity Relative
c. Simple aggregative price index number d. Weighted aggregative price index number

CA Vinod Reddy - [email protected]

369
Index Numbers

37 P01 is the index for time.

a. 1 on 0 b. 0 on 1 c. 1 on 1 d. 0 on 0

38 P10 is the index for time.

a. 1 on 0 b. 0 on 1 c. 1 on 1 d. 0 on 0

39 Pab is the index for time.

a. a on b b. b on a c. a on a d. b on b

40 When product of price index number and quantity index number is equal to
corresponding value index number then the test that holds good is ______________ .
a. Unit Test b. Time Reversal Test
c. Circular Test d. Factor Reversal Test

41 The formula should be independent of the unit in which or for which prices and
quantities are quoted in :
a. Unit Test b. Time Reversal Test
c. Circular Test d. Factor Reversal Test

42 Fisher’s ideal formula does not satisfy _______ test.

a. Unit Test b. Circular Test c. Time Reversal Test d. None of these

43 Laspeyre’s and Paasche’s method __________ time reversal test.

a. Satisfy b. Do not satisfy c. Sometimes satisfy d. Can satisfy

44 There is no such thing as unweighted index numbers.

a. True b. False

45 Theoretically GM is best avg in construction of index numbers but in practice,

mostly AM is used -
a. True b. False

46 The number of tests of adequacy are ________

a. 3 b. 4 c. 8 d. 2

47 We use price index numbers ___________________

a. To measure and compare prices b. To measure prices
c. To compare prices d. None of these

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370
Index Numbers

48 If price of all commodities in a place have increased 1.25 times in comparison to their
base period, the index number of prices of that place now is :
a.125 b. 25 c. 150 d. 225

49 If index number of prices at a place in 2022 is 250 with 2005 as base year then prices
have increased on avg by
a. 250% b. 150% c. 350% d. 50%

50 If prices of all commodities in a place have decreased 35% over the base period prices,
then index number of prices of that place now is ,
a. 35 b. 135 c. 65 d. None of these

51 Link relative index number is expressed for the period of ‘n’ is :

Pn P(n+1)
a. b. Pn c. d. None of these
P(n+1) P(n-1) P(n-1)

52 Fisher’s ideal Price Index

=

53 Fisher’s ideal Quantity Index

=

54 Consumer price index for the year 1957 was 313 with 1940 as the base year. The avg.
monthly wages in 1957 of the workers in the factory be `160, their real wages is :
a. `48.40 b. `51.12 c. `40.30 d. None of these

55
Lasp. Index + Paasche’s Index
Bowley’s Index =
2

My Notes

CA Vinod Reddy - [email protected]

371
 Index Numbers

56
Base Year Current Year
Commodity
Price Quantity Price Quantity
20 125 22 150
28 163 32 170
30 128 32 150
38 193 42 200
42 186 42 193
45 176 48 192
60 185 56 198
70 198 75 210
Find Lasp. Price Index =

Paasche’s Price Index =

Marshall Edgeworth’s. Price Index =

Fisher’s Ideal Price Index =

Dorbish-Bowley’s Price Index =

My Notes

CA Vinod Reddy - [email protected]

372
Index Numbers

Lasp. Quantity Index =

Paasche’s Quantity Index =

Fisher’s Quantity Index =

Marshall Edgeworth’s. Quantity Index =

Dorbish-Bowley’s Quantity Index =

57 Circular test is not met by Laspeyre’s and Paasche’s index OR Fisher’s index.
The simple geometric mean of price relatives and weighted aggregative with fixed weights
meets this test.

58
In 1980, the net monthly income of an employee was `800 p.m. The consumer price index
was 160 in 1980. It rises to 200 in 1984. If he has to be rightly compensated the additional
amount to be paid to employee is
a. `175 b. `185 c. `200 d. `125

My Notes

CA Vinod Reddy - [email protected]

373
Index Numbers

59 Uses of Index Numbers

a. Framing suitable policies in economics & business.
b. They reveal trends and tendencies.
c. They are used for forecasting the future.
d. They are useful in deflating.
e. Useful to measure changes in cost of living.

60 The purpose determines the type of index numbers to use.

a. True b. False

My Notes

CA Vinod Reddy - [email protected]

374
Food For Thought

We FALL
We BREAK
We FAIL

BUT THEN
We RISE
We HEAL
We OVERCOME
CA VINOD REDDY
375
Food For Thought

What makes life so difficult?

‘PEOPLE’

All things are difficult

before they are
EASY
CA VINOD REDDY
376
Food For Thought

CLASSY is when you have

a lot to say
but you CHOOSE to remain
SILENT in front of fools

CA VINOD REDDY

People don’t care for you,

when you are alone
They just care for you
when they are alone!
377
Food For Thought

We are not our best

intentions,
We are what we
DO!

CA VINOD REDDY

No matter where you

are in life,
GOD always has
more in store.
He never wants you to
stop growing
378
Food For Thought

Your .
I CAN
is more
important
than your
I.Q

CA VINOD REDDY
FORM IS TEMPORARY
CLASS IS PERMANENT
379