Solution to Self-Test 7

Chapter 6 : Index Numbers

Q. 1. (A) 
(1) (2) a and b
(2) (4) a, b and c
(3) (1) b, c and d
(B) 
(1) A statistical tool to measure the changes in an economic variable over a
period of time. – Index numbers
(2) An index number measuring the general changes in a single variable over a
period of time. – Univariable Index Number
(3) An index number measuring the general changes in a group of variables
over a period of time. – Composite Index Number
Q. 2. (A) 
(1) 
(A) Identified concept : Index of Agricultural Production.
(B) Explanation of concept : Index of Agricultural Production measures the
general changes in the agricultural production over a period of time. A list
of various agricultural crops like rice, wheat, sorghum, tea, coffee, ginger,
chilli, turmeric, onions, potatoes, sugar cane, bananas, etc. is prepared
and the changes in the production of these crops over a period of time is
measured by the Index of Agricultural Production.
(2) 
(A) Identified concept : Index of Industrial Production.
(B) Explanation of concept : Index of Industrial Production measures the
general changes in the industrial production over a period of time. A list of
various industrial goods like steel, fertilizers, cement, mineral oil, medical
equipment, natural gas, etc. is prepared and the changes in the production of
these products over a period of time is measured by the Index of Industrial
Production.

Solution to Self-Test 7, Chapter 6 – Economics : Std. XII 1

 (B)
(1) Simple Index Number Weighted Index Number

(1) Meaning
Index number measured by giving Index number measured by giving
equal importance (weight) to every suitable importance (weight) to every
commodity are known as simple commodity on the basis of their
index numbers. quantity are known as weighted index
number.
(2) Nature

The measurement of simple index The measurement of weighted index

number is comparatively simple. number is comparatively complex.

(2) Price Index Number Quantity Index Number

(1) Meaning
Price index number is a type of index Quantity index number is a type of
number derived by multiplying the index number derived by multiplying
ratio of sum of the prices of various the ratio of sum of the quantities of
commodities of the current year and the various goods of the current year
sum of the prices of various and sum of the quantities of various
commodities of the base year by 100. goods of the base year by 100.
(2) Formula
∑p Quantity Index Number
Price Index Number P01  1 100
∑p0 ∑q
Q01   1 100
∑q1

(3) Laaspeyre’s Index Number Paasche’s Index Number

(1) Distinctive Feature
A distinctive feature of Laaspeyre’s A distinctive feature of Paasche’s
index number is that it uses a group index number is that it uses a group
of commodities purchased in the base of commodities purchased in the
year period as the basis of comparison. current year period as the basis of
comparison.
(2) Formula
The formula for measuring Laaspeyre’s The formula for measuring Paasche’s
index number is as follows : index number is as follows :
∑p q ∑p1q1
P01  1 0 100 P01  100
∑p0q0 ∑p0q1

2 Solution to Self-Test 7, Chapter 6 – Economics : Std. XII

Q. 3. (1) The features of index numbers are as follows :
(a) Statistical device : Index numbers are statistical devices.
(b) Specialized averages : Index numbers are specialized averages. Index
numbers are capable of being expressed in percentages.
(c) Helpful to measure changes in the variables : Index numbers are helpful
in measuring the net changes in one or more related variables over a period
of time or between two different time periods or two different localities.
(d) Computed for a single variable or a group of variables : Index numbers
are computed for measuring a net change in a single variable or a group of
variables over a period of time. Index number which is computed from a
single variable is called a ‘univariate index’. An index number which is
constructed from a group of variables is called a ‘composite index’.
(e) Prepared for a current year : Index numbers are prepared for a current
year. Index numbers measure a net change in a particular variable from the
base year to the current year.
(f) Based on the base year : Index numbers are prepared with reference to the
base year. Index numbers measure a net change in a particular variable by
taking into account the values of a particular variable in the selected base
year.
(g) Assumption of base year’s index as 100 : While calculating the net change
in the values of a particular variable, the base year’s index of a selected
variable is assumed as 100 and accordingly the value of the selected variable
for the current year is calculated.
(h) Barometers of economic activity : Index numbers are also referred to as
‘barometers of economic activity’, since they are used to measure the trends
and changes in the economy.
(Note : Any four points are expected in answer.)

(2) The significance of index numbers in economics can be explained as follows :

(a) Helpful in framing suitable policies : Index numbers provide guidelines
to policy makers in framing suitable economic policies. Index numbers are
helpful in framing the economic policies such as agricultural policy and
industrial policy. Index numbers also help in the fixation of wages and
dearness allowances in accordance with the cost of living, etc.
(b) Helpful in studying trends and tendencies : Index numbers are widely
used to measure changes in various economic variables such as production,
prices, exports, imports, etc. over a period of time. For example, by
examining the index of industrial production for the last five years,

Solution to Self-Test 7, Chapter 6 – Economics : Std. XII 3

 important conclusions about the trend of industrial production, i.e. whether
the industrial production shows an upward tendency or a downward
tendency can be drawn.
(c) Helpful in forecasting future economic activity : Index numbers helps in
making predictions on the basis of analysing the past and present trends in
the economic activities. For example, by examining the data pertaining to
exports of alphonso mangoes from the year 2009 to 2014 and from the year
2014 to 2019, if it is noticed that the export of alphonso mangoes has been
increasing, it can be predicted that an increase in export will continue in
future.
(d) Helpful in measurement of inflation : Index numbers are also used to
measure changes in the price level from time to time. The measurement of
inflation enables the government to undertake appropriate anti-inflationary
measures. For example, there is a legal provision to pay the D.A. (Dearness
Allowance) to the employees in organised sector on the basis of changes in
Dearness Index. Thus, with the help of the Dearness Index, the government
can increase the D.A. from time to time.
(e) Useful to present financial data in real terms : Rise in money supply over
a period of time leads to inflation in an economy. Inflation has its effects on
various economic variables such as total production, national income, price
level, wage level, etc. Index numbers can exclude the effects of inflation by
deflating the values of these various economic variables on the basis of their
constant prices. Thus, index numbers can measure the changes in the values
of various economic variables in real terms.
(Note : Any four points are expected in answer.)
(3) 
Base Year Quantities Current Year Quantities
Commodity
(Base Year) q0 (Current Year) q1

P 170 90

Q 150 70

R 100 75

S 195 150

T 205 95

Total ∑q0820 ∑q1480

4 Solution to Self-Test 7, Chapter 6 – Economics : Std. XII

 ∑q
Price Index Number Q01   1 100
∑q0
480
 Q01  100
820
24
 Q01  100
41
2400
 Q01 
41

 Q01= 58.536

 Quantity Index Number  58.54

Solution to Self-Test 7, Chapter 6 – Economics : Std. XII 5