Math Project-2

Section C

AIM:
Identify the purchasing power using the concept of cost-of-living
index number.
Introduction: -
Index number is a specialized average designed to measure the
change in the level of an activity or item, either with respect to time
or geographic location or some other characteristic. It is described
either as a ratio or a percentage. For example, when we say that
consumer price index for 2016 is 175 compared to 2010, it means
that consumer prices have risen by 75% over these six years.
Study of index numbers reveals long term trends also. By using
suitable time frame to calculate index numbers, we can find
seasonal variations, cyclical variation, irregular (or abnormal)
changes and long-term trends of any activity - whether it is sale of
ice cream, or absence from school, or literacy level in a district, or
unemployment problem, or sale of Ambassador cars by Birla, and
so on.

History of Purchasing Power and Index Number:

Purchasing Power:
 Purchasing power is the amount of goods and services that can be
purchased with a unit of currency. For example, if one had taken
one unit of currency to a store in the 1950s, it would have been
possible to buy a greater number of items than would be the case
today, indicating that the currency had a greater purchasing power
in the 1950s.
If one's monetary income stays the same, but the price level
increases, the purchasing power of that income falls. Inflation does
not always imply falling purchasing power of one's money income
since the latter may rise faster than the price level. A higher real
income means a higher purchasing power since real income refers
to the income adjusted for inflation.
Traditionally, the purchasing power of money depended heavily
upon the local value of gold and silver, but was also made subject to
the availability and demand of certain goods on the market. Most
modern fiat currencies, like US dollars, are traded against each
other and commodity money in the secondary market for the
purpose of international transfer of payment for goods and services.
For a price index, its value in the base year is usually normalized to
a value of 100. The purchasing power of a unit of currency, say a
dollar, in a given year, expressed in dollars of the base year, is
100/P, where P is the price index in that year. So, by definition, the
purchasing power of a dollar decreases as the price level rises.
Index Number:
In 1707, Englishman William Fleetwood created perhaps the first
true price index. An Oxford student asked Fleetwood to help show
how prices had changed. The student stood to lose his fellowship
since a 15th-century stipulation barred students with annual
incomes over five pounds from receiving a fellowship.
It is Lowe, Joseph who should be seen, according to Kendall, M.G.
(1977), as the true father of index numbers. His work, published in
 1822, called the present state of England, treated many problems
relative to the creation of index numbers.
Index Numbers:
The value of money is going down, we hear every day. This means
duty since prices if things aging up, we get lesser and lesser
quantities of the same item for super. The work says the increases
in wages are not keeping up with inflation, and so actual wages are
given-or that standard of living is going down. People in Delhi say
that property price skyrocketed, compared to cities like Kolkata and
Chennai, or even Hong Kong Similarly cue tale in Delhi is
increasing, even outstripping increase in population, In all these e
making comparisons, either in terms of time, or in terms of
geographic locations. This so to define a very useful and widely
used statistic-the index number. An index number amply a ratio of
two quantities, such as prices, values or other economic variables
taken at no different periods of time. Thus, it helps to compare the
change with similar data collected the base period or fixed period.
Wholesale Price Index (WPI) and Consumer Price Index (CPD) are
widely used terms. They indicate the inflation rates, and also
charges in standard of living. Consumer price index is based on
prices of five sets of items - Food, Housing (Rent), Household
goods, Fuel and light, and Miscellaneous. Each item is based on
study of a number of items-e.g. Food includes Rice, Wheat, Dal,
Milk, and so on Thus, the characteristics of index numbers are:
-they are expressed as ratio or percentage.
-they are specialized averages.
-they measure the change in the level of a phenomenon.
-they measure the effect of change over a period of time they
measure changes not capable of direct measurement, they measure
relative changes in an economic activity by measuring those factors
which affect that activity.
Uses:
 Index numbers are important tools of business and economic
activity. Their main uses are:
1. They are used to feel the pulse of the economy. Thus, the index
numbers work as barometers.
2. They help in framing suitable policies and take decisions relating
to wages, prices,
3. They reveal trends and tendencies. They are used as indicators of
inflationary or
4. They are used to measure the purchasing power of money.
5. They help in forecasting future economic activity.
Questions: -
Question 1: Find by simple aggregate method, the index number from the
following data:
Commodity Base Price (Rs) P0 Current Price
(Rs) P1
Rice 30 35
Wheat 22 25
Fish 54 64
Potato 20 25
Coal 15 18
Total ΣP0 =141 ΣP1 =167
Hence, required index number by simple aggregate method,
P01 = ΣP1 / ΣP0 x100=188.44
Thus, we see that there is an average increase of about 18.44% in the
commodities.
Question 2: Find the consumer price index for 2007 on the basis of 2005
from the following data 1 average of price relative method:
Items Food Rent Cloth Fuel
Price in 2005 200 100 150 50
(Rs)
 Price in 2007 280 200 120 100
(Rs)

Weight 30 20 20 10
Items Weights Price base year Price base year Price relative I= Iw
2005 P0 2007 P1 P1/P0x100

Food 30 200 280 280/200x100 4200

=140
Rent 20 100 200 200/100x100 4000
=200

Cloth 20 150 120 150/120x100 1600

=80
Fuel 10 50 100 100/50x100 2000
=200

Σw=80 ΣIw=11800

Using weighted average of price relative method,

index number (in 2007) = ΣIw/Σw=11800/80=147.5

Conclusion: -
In the study of statistics, index numbers are the utmost requisite.
Imagine how it would be without these numbers while you change
the variable in the estimation of any particular statistics! The
procedure itself will turn out to be completely ineffective. Thus,
index numbers are the measurement of any change in a variable or
variables across a determined period. These numbers show a
general relative change and not a direct measurable figure. An
index number is expressed in the percentage form.
 Index numbers are most commonly used in the study of the
economic status of a particular region. As mentioned, the index
number defines the level of a variable relative to the level in a
particular period of time span. These index numbers serve as a
measure to study the change in the effects of all the factors that
cannot be measured or estimated on a direct basis. Thus, Index
numbers occupy an important place due to their efficacy in
measuring the extent of economic changes across a stipulated
period. It helps to study such changes' effects due to factors that
cannot be directly measured.
Bibliography: -
byjus.com
Wikipedia.org
basic-mathematics.com
cuemath.com