AN ISO 9001:2008 Certified

ECO * PACE Since1993

SCHOOL OF ECONOMICS Regd.

RAKESH SHARMA , M.A.(ECO.),B.Ed., PGDMM
SCF-77, Sector-10. 9417508881,
INDEX NUMBER
Q.(1) Explain The term ‘index number’?
Ans. An index number is a specialised average designed to measure the net change in a group of related variables
over a period of time.
Q.(2) Define base year.
Ans. Base year is the year with reference to which price of the current year are compared to construct index number.
Q.(3) What is meant by simple index number?
Simple index number is an index number in which all the items of a series are given equal weights (importance)
Q.(4) What is meant by weighted index number
Ans. weighted index number is an index number in which different items are given different importance
in terms of different weights.
Q.(5) Write a note on uses of index numbers.
Ans. Following are the main uses of index numbers.
(1) To simplify complicated matters: index numbers present the given information in such a manner
that it can be easily understood.
(2) To measure comparative change: Index numbers facilitate comparison of changes from time to time.
Among different places and in series expressed in different units. The changes in price level, cost of living
etc which are not capable measurement directly with the help of index numbers.
(3) To frame suitable policies: index numbers guide a lot in framing suitable economic policies. For
example , wholesale and retail price index number help in economic and business policy-making
regarding price, output demand, sales etc. The indices of consumption of various commodities
help in the planning of their future production. index number are applied with advantages for
formulating and revising their policies from time to time.
(4) To measure the purchasing power of money : Index numbers are helpful in measuring the purchasing
power i . e value of the money . this helps in fixing proper wage policy in the country. To study trends and
to make forecast: Index number are most widely used for measuring change over a period of time. On
the basis of present indices , the forecast for the future can be made.
(5) To study trends and to make forecast: Index number are most widely used for measuring change over
a period of time. On the basis of present indices , the forecast for the future can be made
Q.(6) Explain the difficulties faced in preparing the price index number.
Ans. Following are the difficulties faced in preparing the price index number:
(1) Selection of the commodities: The first difficulty is related to be the selection of representative
commodities. The number of commodities should neither be large nor small.
(2) Selection of base year: Base year should be a normal year in all respects i.e it should be free from all
types of abnormalities .Base year should neither be too old nor too near from current year.
(3) System of weighting : Anther difficulty is related to weighting . the difficulty is related to: (a) By what do we
weight (b) What type of weight is to be used and (c) the time from which weights should be taken.
(4) Selection of prices : The next difficulty is to obtain price Quotations for the base year and current year.
(5) Average. Different kinds of averages may be used in constructing index number. Hence, there is
a difficulty in selecting the average.
Q.(7) Discuss , in brief, the methods of constructing weighted index numbers.
Ans. There are two method of constructing weighted index numbers.
(1) Weighted Average of price relatives method. (2) Weighted aggregated method.
(1) Weighted Average of price Relatives Method: Under this method commodities are accorded
weights according to their Quantity. Weighted sum of price relative is divided by the sum total of
the weights . thus,
P01= ∑RW Here, W= Weight

∑W R= Price Relative= P1 X 100

P0
(2) Weighted Aggregate Method: Under this method , commodities are accorded weights according
to the Quantities purchased .Following are the popular methods:
(a) Laspayer ’s Method : when quantities of the base year are used as weights , the method is
called Laspeyre’s Method .its formula is as under:
P01 = ∑P1 q0 X 100
∑P0q0
(b) Paasche’s method : When Quantities of the current year are used as weights , the method is
called paasche method, its formula is as under.
P01 = ∑ P1q1 X 100
∑P0 q1
(c) Fisher method: When the quantities of both base year as well as current year are used as
Weights , the method is called fisher’s method .this method combines both the Laspeyre’s
Method and Paasche’s Method. Its formula is as under:

P01 = ∑P1 q0 X ∑ P1q1 X 100

∑P0q0 ∑ p0q1

Limitation of Index Number:

(1) Provides relative change only: Index numbers are only estimates of relative changes in various events. They
cannot speak the truth as they are only the approximate indicators. They represent the generalised truth, which is
obtained on the basis of average of all the items. Hence, it does not apply to individual units.
(2) Lack of perfect Accuracy: Quite often index numbers are based on sample items, i.e each and every item is not considered . if
samples are inadequate or selected by erroneous method, index number is bound to give inaccurate result.
(3) Difference between purpose and method of construction: When an index number is constructed for a special
purpose by a specific method, then such index number will not be appropriate for all other purposes and situations.
If they are used for other purposes, it is bound to give erroneous inferences.
(4) Ignores qualitative changes: While constructing the price of production index numbers, no attention is paid to
the changes in quality of the product. An increase in price may be due to improvement in the quality of the product .
Such changes are not reflected in the index numbers.
Q.(8) What is meant by consumer price index Number? Briefly Explain the utility of the consumer price index numbers.
Ans. Consumer price index number refer to be the index number which measures the effects of change in the price
levels of the current year in comparison with base year on the living standards of consumers. Consumer price index
number are designed to measure the average change over time in the price paid by the ultimate consumer for a
specified quantity of goods and services . Such index numbers represent the amount and direction of change in
cost of living and therefore, are called cost of living index Numbers also. Following are the points to explain the utility
of consumer price index Numbers:
(1) Consumer Price index Numbers serve as a measure of change in retail price of a specified quantity of goods and
services.
(2) Consumer price index Number help in wage negotiation and dearness allowance adjustments etc.
(3) The government can make use of such index number in framing wage policy , price policy, rent control , taxation and economi c policies.
(4) Such index number are used to analyse the market trends of specified commodities.
(5) These index numbers help in measuring the change in the purchasing power of money and real income.
Methods of the construction of consumer’s Price index.
(1) Aggregative Expenditure Method CPI=∑p1P0 X 100
∑P0P0
(2) Family Budget Method: CPI= ∑ RW W= P0 xQ0
∑W R= P1 x 100
P0
 Q.(9) What is meant by wholesale price index Number? State the uses of wholesale Price index number.
Ans. Wholesale Price index number refers to an index number which measure the average change in the
wholesale price. Wholesale price index number is an indicator of change in the general price level. It is constructed
by attaching appropriate weights to the commodities which are classified in the three groups:
(1) Primary commodities such as food and non – food commodities.
(2) Fuel, power, light and lubricants. (3) Manufactured goods.
Following are the uses of wholesale price index number:
(1) Wholesale price index number is used to measure the rate of inflation as whole as well as for different
groups of commodities.
(2) Wholesale price index number may be used to forecast future prices.
(3) Wholesale price index Number may be used to estimate the future demand and supply situations.
(4) Wholesale price index number may be used to eliminate the effect of change in price on
aggregates such as national income, capital formation etc.
Q.(10) Features or characteristics of index number.
Ans. 1. Index number are specialised average. Index number are used for comparisons in such
situation. For example , while constructing consumer price index the various goods and service like food,
clothing, electricity, fuel etc. are expressed in different units. An average of all these goods and services,
(expressed in different units) is calculated by using the technique of index numbers
2. Index numbers are the measures of relative change. Index numbers measure relative (percentages) change
in the variables over a period of time. index number are expressed in percentages. These present estimates of
percentage change in the variables over time with reference to some basic year.
3.Basis of comparison. Index numbers are constructed to make comparisons over different time periods with reference to
some base year. in other words, index number measure change in variables over time with reference to the base year.
Q(11) What is the relationship between inflation and index number?
Ans. Inflation is described as a situation characterised by a sustained increase in the general price level. A small rise in price or
an irregular price rise cannot be called inflation. It is a persistent and appreciable rise in price. If inflation is not controlled,
money will not able to perform its function as a unit of value or medium of exchange .inflation lowers the value of money i.e ,
the purchasing power of money goes down.
Wholesale price index (WPI)is the most commonly accepted measure of inflation, due to following attributes.
(1) The Wholesale Price index (WPI)is the most widely used price index as an indicator of the rate of
inflation in the economy.
(2) It is only general index capturing price movements in a commodities way and indicates movement in
price of commodities in all trade and transactions.
(3) WPI is available on a weekly basis with the shortest possible time lag of 2 weeks.
As a result of inflation, real value of monetary income changes. Real value of money or wages can be
calculated using the following formula .Real income or wages= Present Wages X100
Present price index
Q.(1) An enquiry into the budgets of the middle class families in a certain city gave the following information .
Expenses on item Food 35% Fuel 10% Clothing20% Rent15% Miscellaneous20%
Price in 2004 1500 250 750 300 400
Price in 1995 1400 200 500 200 250
Ans. 134.5
Q.(2) The monthly per capita expenditure incurred by workers of an industrial centre during 1980 and 2005 on the
following item are given below. The weights of these items are 75, 10, 5,6 and 4,respectively.prepare a weighted
index number for cost of living for 2005 with 1980 as base.
Items Food clothing Fuel and lighting House rent Miscellaneous
Price in 1980 100 20 15 30 35
Price in 2005 200 25 20 40 65
Ans.185(approx)
Q.(3) Calculate the ‘cost of living index number ’using family budget method.
commodity Wheat Rice Pulses Ghee sugar oil fuel Clothes
Units consumed in base year 200 50 56 20 40 50 60 40
Price(base year) 1.0 3.0 4.0 20.0 2.5 10.0 2.0 15.0
Price (current year) 1.2 3.5 5.0 30.0 5.0 15.5 2.5 18.0
Ans.136(approx)
Q.(4) Following Are the price of commodities in the years 2001 and 2005.Calculate the price index using price relative method.
Commodity A B C D E F
Price in 2001 45 60 20 50 120 85
Price in 2005 55 70 30 75 130 90
Ans.125(approx)
Q.(5) Construct cost of index number for 2006 on the basis of 1994 from the following data using aggregative
expenditure method and family budget method.
Article A B C D E
Quantity 10 7 5 2 2
Price 1994 20 21 20 10 6
Price 2006 30 28 25 12 8
Ans.138
Q.(6) Construct the index of industrial production from following data.
Industry Mining Electrical products Manufactured goods
Output 2002 120 200 150
Output 2005 180 290 220
weight 25 45 30

Ans.146(approx)
Q.(7) Using paasche’s , Laspayers and fisher’s Method. compute the quantity index for the year 2004 with 1995 s base year.
Commodity A B C D E
1995 5 100 80 60 30
2004 100 150 100 72 33
1995 6 500 320 150 360
2004 150 900 500 360 297
Ans.119(approx)
Q.(8) compute paasche’s and Laspeyre’s and fishers index number from the following data.
Commodity Base Year Current year
quantity Price Quantity Price
A 40 4 35 3
B 15 3 20 4
C 20 6 15 5
D 30 5 25 2

Ans. Paasche’s index=74.70 , Laspeyre’s index=71.58

Q.9 Construct index numbers for 2016-17 taking 2011-12 as the base year from the following data by simple Aggregate Method.
Commodity Price in 2011-12 Price in 2016-17
Wheat 20/ kg 25/kg
Rice 30/kg 40/kg
Pulses 60/kg 80/kg
Sugar 30/kg 40/kg
Ans= 132.14
Q.10 The following are two sets of retail prices of a typical family’s shopping basket. The data pertain to retail prices during 2001 and 2007.
Commodity Price (in rs 2001) Price in rs 2007
Milk ( 1 litre) 18 20
Banana ( 1 dozen) 15 15
Butter ( 1 kg) 120 150
Bread ( 400 gm) 9 14
Calculate the simple aggregate price index for 2007 using 2001 as the base year. Ans= 122.83
Q.11 Construct an index for 2016-17 taking 2011-12 as the base by the simple average of price relative method.
Commodities A B C D
Price ( 2011-12) 10 20 30 40
Prices (2016-17) 13 17 60 70
Ans= 147.50
Q.12 From the following data, construct an index for 2016 taking 2011 as base by the simple average of relatives method.
Commodities A B C D E
Price ( 2011) 50 40 80 100 20
Prices (2016) 70 60 100 120 20
Ans= 127
Q.13 From the following data , calculate price index numbers for 2016 with 2011 as base by:
(1) Laspeyre’s Method, (ii) Paasche’s Method (iii) Fisher’s Method
Commodity Base Year ( 2011) Current year ( 2016)
Price P0 Quantity q0 Price P1 Quality q1
A 20 8 40 6
B 50 10 60 5
C 40 15 50 15
D 20 20 20 25
(i) 124.69 (ii) 121.77 (iii) 123.22
Q.14 For the data given in the following table , compute index number by: (1) Laspeyre’s Method, (ii) Paasche’s Method (iii) Fisher’s Method
Commodity Base Year Current year
Price P0 Quantity q0 Price P1 Quality q1
A 10 30 12 50
B 8 15 10 25
C 6 20 6 30
D 4 10 6 20
Ans-= (i) 118.965 (ii) 119.79 (iii) 119.37
Q.15 Calculate the price index numbers by: (1) Laspeyre’s Method, (ii) Paasche’s Method (iii) Fisher’s Method
Commodity Base Year (2011-12) Current year ( 2016-17)
Price Value ( total exp.) Price Value (total exp.)
A 2 200 3 300
B 8 72 10 100
C 12 60 15 90
D 7 49 10 80
Ans= 140.42 (ii) 139.70 (iii) 140.05
Q.16 On the basis of the following information , calculate Fisher’s Index number.
Commodity Base Year Current year
Price P0 Quantity q0 Price P1 Quality q1
A 6 50 10 56
B 2 100 2 120
C 4 60 6 60
D 10 30 12 24
E 8 40 12 36
Ans= 139.74
Q.17 Calculate the index number by weighted relatives method from the following data for the year 2016 with 2011 as the base year.
Commodity Quantity in 2011 ( units) Price in 2011 Price in 2016
A 80 5 8
B 65 8 14
C 42 12 18
D 37 4 5
E 31 4 5
F 15 2 4
Ans= 156.77
Q.18 Calculate cost of living index, for the following data, using aggregate expenditure and family budget method.
Commodity Prices Quantity in units
2011 2016 2011
A 10 15 15
B 8 12 20
C 20 24 10
D 32 40 5
E 15 20 6
F 12 18 2
G 8 10 1
Ans= 135.22
Q.19 Compute the index number using (i) Aggregate expenditure Method, (ii) Family Budget method ,
for the year 2016 with 2011 as the base year , from the data given below.
 Commodity Quantity in 2011 ( units) Price in 2011 Price in 2016
A 100 8 12
B 25 6 7.50
C 10 5 5.25
D 20 48 52
E 25 15 16.50
F 30 9 27
Ans= 142.13
Q.20 From the data given below , construct the index number for the year 2016 on the base of 2011 by simple aggregative method.
Commodities Unit Price
2011 2016
Wheat Quintal 200 250
Rice Quintal 300 400
Pulses Quintal 400 500
Milk Litre 2 3
Clothing Meter 4 5
Ans= 127.81
Q.21 Construct index numbers by aggregative method ( based on the price of 2011) from the following figures:
Items A B C D E F
Prices 2011 200 60 350 100 60 80
Prices 2016 240 90 600 110 62 90
Ans= 140.235
Q.22 Calculate the index numbers from the following data using .
(1) Laspeyre’s Method, (ii) Paasche’s Method (iii) Fisher’s ideal Method
Commodity Base Year Current year
Price P0 Quantity q0 Price P1 Quality q1
A 8 100 10 120
B 4 60 5 80
C 10 20 12 25
D 12 25 15 30
E 3 5 4 6
(1) Laspeyre’s Method, 124.44 (ii) Paasche’s Method 124.42 (iii) Fisher’s ideal Method 124.43
Q.23 Calculate (1) Laspeyre’s Method, (ii) Paasche’s Method (iii) Fisher’s ideal Method numbers from the following data.
Commodity Base Year Current year
Price P0 Quantity q0 Price P1 Quality q1
A 10 30 12 50
B 8 15 10 25
C 6 20 6 30
D 4 10 6 20
(1) Laspeyre’s Method, 118.965 (ii) Paasche’s Method 119.79 (iii) Fisher’s ideal Method 119.376
Q.24 Calculate weighted average of price relative index numbers of prices for 2016 on the basis of 2011 from the following data.
Commodity Quantity in 2011 Price in 2011 Price in 2016
A 20 20 35
B 12 15 18
C 8 10 11
D 4 5 5
E 6 4 5
Ans= 149.715
Q.25 Construct cost of index numbers for 2016 on the basis of 2011 from the following data using aggregate expenditure method and Family Bud get method.
Article Quantity (kg) Price
2011 2016
A 10 20 30
B 7 21 28
C 5 20 25
D 2 10 12
E 2 6 8
Ans= 138
Q.26 Calculate the index number for 2016 with 2012 as base using the weighted average of price relative method
for the following data.
Commodity Quantity in 2012 Price in 2012 Price in 2016
A 2 12 24
B 8 8 12
C 4 15 27
D 5 6 18
E 1 10 12
Ans= 188.297
Q.27 Construct an index for the year 2016 taking 2011 as base by simple average of price relative method.
Items P Q R S
Price in 2011 30 50 70 90
Price in 2016 40 60 80 100
Ans= 119.68
Q.28 Using Paasche’s formula , compute the quantity index for the year 2016 with 2011 as base year.
Commodity Quantity Value
2011 2016 2011 2016
A 5 100 6 150
B 100 150 500 900
C 80 100 320 500
D 60 72 150 360
E 30 33 360 297
Ans= 119.177