3 ¢ ¢ ¢ + ¢ ¢ o ¢ + Index Numbers INTRODUCTION USES OF INDEX NUMBERS PROBLEMS IN THE CONSTRUCTION OF INDEX NUMBERS METHODS OF CONSTRUCTING INDEX NUMBERS QUANTITY OR VOLUME INDEX NUMBERS VALUE INDEX NUMBERS TESTS OF ADEQUACY OF INDEX NUMBER FORMULAE THE CHAIN INDEX NUMBERS BASE SHIFTING, SPLICING AND DEFLATING THE INDEX NUMBERS CONSUMER PRICE INDEX NUMBERS INDEX NUMBER OF INDUSTRIAL PRODUCTION MISCELLANEOUS ILLUSTRATIONS536 jntRODUCTION wally, the first storically, thee : via price index in 1 e index was constructed in 1764 50 with the price level in 1500, Thou mp fr measuring the effect of change in prices, inde ony developed ae one of the most widely used statistiea) ae have today aly any field where they are aeerere Newspapers there s ital prices are going up oF down, that industria} Produ the fact falling, that imports are increasing or decreasing, that a jon rising OF : particular period compared to the previous perioq as es ee nimbers. They are used to feel the pulse of the econy cls Oy neve come to be used as open inflationary or deflating tendencies. In fact, they are described as barometers of economic acta ie, if one wants to get an idea as to wl at is happening to an ceonond he should look to important indices like the index number of jin ae Itural production, business activity, etc. ia roduction, agricul i ) , Some prominent definitions of index numbers are given below: Ap an 1. "Index numbers are devices for measuring differences in the magnitude of a group of related variables." ; —Croxton & Cow len 2. "An index number is a statistical measure designed to show changes in 4 variable or a group of related variables with respect to time, geographic location and other characteristics such as income, profession, etc." —Spiege! 3. "In its simplest form an index number is the ratio of two index numbers, expressed as a per cent. An index number is a statistical measure—a measure designed to show changes in one variable or in a group of related variables over time, or with respect to geographic location, or in terms of some other characteristics." —Patterson | 4, "In its simplest form, an index number is nothing more than a relative number, or a ‘relative’ which expresses the relationship between two figures,| where one of the figures is used as a base." —Morris Hamburg 5. "Generally speaking, index numbers measure the size or magnitude of some object at a particular point in time as a percentage of some base of reference object in the past." —Berenson & Levine | It ts clear from the above definitions that an index number is a specialized average designed to measure the change in a group of related variable over a period of time. Thus when we say that the index number of wholesale prices 's 2 for January 2016-17 compared to January 2015-16, it means there isa net increase in the price: f 12 per cent during the ae S of wholesale commodities to the extent © Index umber. ; U Cane Perea in effect, relate a variable or variables in a given period t index, the gj ‘ aes variables in another period, called the base period. A" mplified name for index numbers, which is computed from 4 single varie ; Ss constructed fen a, called a univariate index, whereas an index which is group of variables is considered a composite index. or a proper under: i si ; . - are worth Considering devel of the term index number, the following (0 Index numbers are spe points no ar on eniulized averages : As explained in the chaptet ‘o average is a single figure representing a grOUP ae ee an average the items must be comparable: Ve of men, women and children of a certain local”> 537 e yuMBERS yo . Furthermore, the unit of meas raning at all urement must be the pas © me the items. Thus an average of the weight expressed in kg., lb., we for 8 ing. However, this is not so with index numbers. Index no mean . -e used for purposes of comparison in situations where two or more essed in different units or the series are composed of different items. For example, while constructing a consumer price index the items are divided into broad heads, namely (i) Food, (ii) Clothing, ae and Lighting, (ix) House Rent, and (v) Miscellaneous. These items are ru ed in different units : thus, under the head ‘food’ wheat and rice may | ese 4 per quintal, ghee per kg., etc. Similarly, cloth may be measured in . rege: metres. An average of all these items expressed in different units is ere d by using the technique of index numbers. dl (i Index numbers measure the net change in a group of related variables. ce index numbers are essentially averages they describe in one single re the increase OT decrease in a group of related variables under study. The group of variables may be the prices of a specified set of commodities, the yolume of production in different sectors, etc. Thus, if the consumer price | index of working class for Delhi has gone up to 113 in May 2017 compared to May 2016, it means that there is a net increase of 13 per cent in the prices of commodities included in the index. Similarly, if the index of industrial production is 118 in 2017 compared to 2016 it means that there is a net increase in industrial production to the extent of 18 per cent. It should be carefully noted that even where an index is showing a net increase, it may include some items which have actually decreased in value and others which ‘have remained constant. (ii) Index numbers measure the effect of changes over a period of time. Index numbers are most widely used for measuring changes over a period of time. ‘Thus we can find out the net change in agricultural prices from the beginning of First Plan period to the end of the Eleventh Plan period, ie., from 1951 to 212, Similarly, we can compare the agricultural production, industrial Production, imports, exports, wages, etc., at two different times. However, it paid be noted that index numbers not only measure changes over a period me but also compare economic conditions of different locations, different ae on different cities or different countries. But since the basic problems Dblished ly the same and since most of the important index numbers ae by the Government and private research organisations refer to data measuring different times, we shall consider in this chapter index numbers aDplied ne change relative to time only. However, methods described can be other areas also. “sors ae as are EXP u “85 OF INDEX NUMBERS Inde, or signin are indispensable tools of economic and business analysis. They heanee can be best appreciated by the following points: Policies, ia elp in framing suitable policies. Many of the economic and business Bease Te guided by index numbers. For example. while deciding the 2a primgggeness allowance of the employces. ihe employers have 1 wg in ae upon the cost of living index. If wages and salar pees and Dupes which wanee with the cost of living, very often It es mn Sndtex bers vid in turn cause considerable waste of resourses at : © Some guideposts that one can use in making decis >»hough index numbers are most widely use. and economic conditions, there is a large index numbers are useful. For example, so. indices; psychologists measure intelligence quotie: Spe index numbers comparing a person's intelligence ee yd for his or her age; health authorities prepare indices t, - la adequacy of hospital facilities and educational reece display ck devised formulae to measure changes in the eflectivenese” Or Zanis, (i They reveal trends and tendencies. Since index fa of Schoo used for measuring changes over a period of time the qeets enable us to study the general trend of the phenome time example, by examining index number of imports for Than fe years we can say that our imports are showing an Gnee 7 for the last 9 are rising year after year. Similarly, by examining ae tendency, re 810 industrial production, business activity, etc., for the last enn : conclude about the trend of production and business acti ity e the trend of the phenomenon under study we can Gea By &xamin, conclusions as to how much change is taking place eae importan, seasonality, cyclical forces, irregular forces, ete. Thus inde: the eltect of highly useful in studying the general business conditions. umber are (ii) They are important in forecasting future economic activi; numbers are useful not only in studying the past and present working; Index economy, but they are also important in forecasting future economics of our Index numbers then are often used in time series analysis, the historical sta, of long-term trend, seasonal variations and business cycle development, that business leader may keep pace with changing economic and businese conditions and have better information available for decision-making Purposes, (iv) Index numbers are very useful in deflating*. Index numbers are highly useful in deflating, ite., they are used to adjust the original data for price changes, or to adjust wages for cost of living changes and thus transform nominal wages into real wages. Moreover, nominal income can be transformed into real income and nominal sales into real sales through appropriate index numbers. din the number of clologists ma eva Classification of Index Numbers Index numbers may be classified in terms of what they measure. In economics and business the classifications are : (1) price; (2) aed (3) value; and (4) special purpose. A price index is most eauen a a It compares levels of prices, from one period to another. A Corie put measures how much the quantity or number of a variable c! ie ae time. The value index measures the changes in the rupee s uantity variable. In fact the value index combines both the price and 4 changes and presents a more informative index. Only price and quantity index numbers are discussed ance both sinc will be mentioned, but .without detail, of how to construct then “oplems in value and special purpése index numbers do not offer types of index nde ji i S + construction. Since the method of construction of various | price i number can be understood if the technique of constructing number is clear, we shall devote major attention to them. tay one of oo” of the + In “ bers are t ie * In the words of Simpson and Kafka : “Index num! re the pulse or most widely used statistical devices .... They are ee of inflation® economy and they have come to be used as indic: deflationary tendencies.” of the__y NUMBE Ro r IN THE CONSTRUCTION OF INDEX NUMBERS opLEMs pr vonstructing int fore oms: Ber wind problems: follo’ dex numbers a careful thought must be given to the ose of the Index At the very outset the purpose of y. The yg the index must be very clearly decided—what the index is to pstrucline why? There is no all-purpose index. Every index is of limited ; lar use. Thus, a price index that is intended to measure a srs’ prices must not include wholesale prices. And if such an consume itended to measure the cost of living of poor families, great care inde ne taken not to include goods ordinarily used by middle class and shoul income groups. Failure to decide clearly the purpose of the index PL lead to confusion and wastage of time with no fruitful results. a problems such as the base year, the number of commodities to be Beuded., the prices of the commodities, etc., are decided in the light of Be purpose for which the index is being constructed. ‘The problem of the scope of the index, ie., the field covered by the index. is bound up with the purpose of the index and the data available. The data qvailable, or rather the lack of them, may necessitate the modification of the purpose. asure 4 mq particu 2. Selection of a Base Period Whenever index numbers are constructed a reference is made to some base period. The base period of an index number (also called the reference period) is the period against which comparisons are made. It may be a year, a month or a day. The index for base period is always taken as 100. Though the selection of the base period would primarily depend upon the object of the index, the following points need careful consideration of base period: () The base period should be a normal one. The period that is selected as base should be normal, ie., it should be free from abnormalities like wars, earthquakes, famines, booms, depressions, etc. However, at times it is really difficult to select a year which is normal in all respects—a year Which is normal in one respect may be abnormal in another. To solve this Problem an average of a number of years, 3 or 4 (preferably covering one complete cycle), may be taken as the base. The process of averaging will Teduce the effect of extremes. Thus the average of the period from 2014 to 2017 may be considered normal whereas no individual year in that Span can be considered normal. s ye base period should not be too distant in the past. It is desirable a he index based on a fairly recent period, since comparisons with Yaguely set of circumstances are more helpful than comparisons with deamess ainbered conditions. For example, for deciding increase in 2005 as th ‘owance at present there is no advantage in taking 1995 or the Vear ae base ; the comparison should be with the preceding year or ler which dearness allowance has not been revised. tw 5, ~ Fued base or ade as chain base. While selecting the base a decision has to have a tine whether the base shall remain fixed or not. ie., whether ‘ed base or chain base index. In the fixed base method, the Jeyear or the period of years to which all Other prican constant for all umes. On the other hand, in the chain ie are rey prices of a year are linked with those of the Preceding ae , tite the fixed year. Naturally the chain base method gives 4 and nt th, than what is obtained by the fixed base method. However “Mer ou depend upon the purpose of constructing the index. . much yA ld 3. Selection of Number of Items The items includeq should be determined by the purpose for which the index ig 2" ing | Every item cannot be included while constructing an index CONStryey | hence one has to select a sample. For example, while construc ber ang index it is impossible to include each and every commodity sing ; necessary to decide what commodities to include. The commioditin be selected in such a manner that they are representativé eae habits and customs of the people for whom the index is Meant. ae Stes consumer price index for working class, items Tike Scooters, mot’ ing refrigerators, cosmetics, etc., find no place. A decision must also i Cars, on the number of commodities to be included and their qualities Hi should ..ste that the larger the number of commodities included Tne We representative shall be the index but at the same time the greater ee be the cost and the time taken. The Purpose of the index shall help ‘ll deciding the number of commodities. Thus, in a general price index» larger number of commodities shall have to be included as compared ty 5 specific purpose index as the index m lormul 1 = | Po” 100} Po. = en a for Where N refers to the number of it¢éms (commodities) whose price fe are thus averaged . Although any measure of central value can be used to obtain the overai index, price relatives are generally averaged either by the arithmetic or tie geometric mean. When geometric mean is used for averaging the price relatives the formula for obtaining the index becomes. Pi x al x 109| Tatives X logP ~ Py log Poi = or = BP where P= Po x 100 OR [ log in x 10] log P Po} = antilog| yy, |= antilog “yy ( veraging : for averagins Other measures of central value are not in common us¢ relatives. sve commodity i" a ad My once P chor referer Ne ase period # * A price relative is the ratio of the price of a see period to its price in another period called the base per» If po and pn denote the commodity pr’ce during the period respectively, then definition: P ¥ i price relative = Pn/Po y 100: adding generally expressed as percentage by multiplying >! —_—xu RS 547 wor F m the following data construct an index for 2017 taking 2016 as base pot of relatives method using (a) arithmetic mean, and (b) geometric mean ie vera S m, be) reroll Price in 2016 (Rs.) Price in 2017 (Rs.) ae 50 7 e 40 a C 80 90 D % 120 E 20 Sn, (a) INDEX NUMBERS USING ARITHMETIC MEAN OF PRICE RELATIVES saitlo aie Price in 2016 (Rs.) Price in 2017 (Rs.) Price relatives ol Po Py Py Py * 190 A 50 70 140.0 . a 40 60 150.0 C 80 90 412.5 D 110 120 109.1 fF 0 20 1000 = A _ la x 100 = 611.6 =—— = rsx 100 -_ Po _ 611.6 _ Poi = y= 122.82 b) INDEX NUMBER USING GEOMETRIC MEAN OF PRICE RELATIVES (6) ~ Commodity Price in Price in Price Log P 2016 2017 Relatives Po Py i A 50 70 140.0 21461 B 40 60 150.0 2.1761 c 80 90 1125 2.0512 D 110 120 109.1 2.0378 ee 20 20 100.0 2.0000 “BogP=104112 Pox = Antilog [too Antilog [ost Antilog 2.0822 = 120.9 oun arithmetic mean and geometric mean have both been used, the arithmetic mean is peered because it is easier to compute and much better known. Some economists, thes, §; . Edgeworth, have preferred to use the median which is not affected by extreme conmoditone the argument is important only when an index is based on a very small number of acine > generally does not carry much weight and the median is seldom used in actual Must fee Prepare Index Numbers of price for three years with average price as base data given below : RATE PER RUPEE COMMODITIES 1s A B c Year ha " 10 kg. 4kg. 3 kg. Year 1 he 9 kg. 35 ko. 3 kg. a alg. 9 kg. 3 kg. 2548 ; STATISHCA, i. \ Wag | Solution. Convert first the prices into rupees for 40 kg. then with this average price as base compute relatives (Base : Aner ve - ce ; » Cn OP Blog Unit Average Frrst Year Second Ye Pape) | price=100 | price Sopa Mr Ya (Base) P ce P Pree A | 40kg 43 40 93 44 | 100 |? B : 11.6 10.0 86 114 98 c . 142 13.3 94 13.3 94 3 | ts Total of Relatives Total 273 Total | 294 | 5, Ng Average of Relatives 1 | 98 Otal | 39) - 0 Note. F indicates Price Relatives For 1st year 10 kg. of commodity A costs Rs. 1. Hence 40 kg. of commodity A will cost + ~40= Rs. 4 Similarly other pnces are obtained. 4 3is the average of 4. 4.4 and 4.4, .e. , the respective prices of the three years Merits § This method has the following two advantages over the method previous + Extreme items do not influence the index. Equal importance is given to all the items + The indea is not influenced by the units in which prices are quoted or by the absolute level of individual prices. Relatives are pure numbers and are. therefore. divorced from the original units. Conse guenuy index number computed by the relatives method would be the same regardless of the way in which prices are quoted : sunple average of price relatives ts said to meet what ts called t a: stactory be Limitations Despite these ments this method is not very saus!: cause of two reasons ti appropnat an vable * Difficulty is faced with regard to the selection of juestiol as que average The use of the anthmetic meat is considered x geoeen® sometimes because it has an upward bias the use ° a almost mean involves difficulues of computation. Other averages“ never used while constructing index numbers e: + The relatves are assumed to have equal importance iat kind of concealed weighting system that is highly ooeners economically some relatives are more important thar ° Weighted Index Numbers te? are ua ene The so-called unweighted index numbers discussed aDOW" Toe 10 "ie in the true sense of the term. They assign equal ra wae items included in the index and as such they are Copier ling weights being implicit rather than explicit. As Comey, by © py unweighted indices. it is possible to get different resu realise implicit weighing (or the unweighted index) ts far from lee’ =f ula : * Please see under “Tests of Adequacy of Index Number For549 pRS yl pe \ ction of useful index numbers requires a conscious effort const commodity 2 weight in accordance with its importance “10 a menon that the index is supposed to describe. ex numbers are of two types : 4 egative Indices, and ed average of Relatives , we ' tive Indices These indices are of the simple pitt PY the fundamental difference that weights are assigned ative OP ems included in various methods of assigning weights and mike var Wy a larige number of formulae for constructing index numbers tn vised of which some of the more important ones are: bee! P saspeyres method * pasche method , Dorbish and Bowley's method . Fisher's ideal method ' jarshall-Bdgeworth method, and . Kellys method. alithese methods are named after the persons who have suggested them. (j Laspeyres Method* The Laspeyers Price Index is a weighted aggregate soe index, where the weights are determined by quantities in the base riod, The formula for constructing the index is : =pi9o 01 = = x 100 1 Spogo Sheps, ‘Multiply the current year prices of various commodities with base year weights and obtain Yp1qo- ‘Multiply the base year prices of various commodities with base year Welghts and obtain Lpoqo. a 3P1do by pogo and multiply the quotient by 100. This gives bs le price index. ene eae attempts to answer the question : “What is the change in 8? This ea the base period list of goods when valued at given period site Primary de is very widely used in practical work. Bemseraton ihe ee of the Laspeyres method is that it does not take lige eN prices e consumption pattern. The Laspeyres index has an upward be 5, Priced iene there is a tendency to reduce the consumption of Bren to thane’ tence: by using base year weights, too much weight will th Prices decli ems which have increased in price the most. Similarly, hoe the most i consumers shift their purchases to those items which . Hems Which a using base period weights, too little weight is given to lecrease most in price, again overstating the index. meth Wed fo, od © cal fh Was devised by ul y Las 5 in 1871 for determining price increases lating the rate of inflation.550 (i) Paasche’s Method* The Paasche price index is price index in which the weights are determineq 7 : given year. The formula for constructing the index tg ' : = Pig = Pod Poi = x 100 Steps. + Multiply current year prices of various co; weights and obtain Yp)q). + Multiply the base year prices of various year weights and obtain ¥poqj. + Divide Ypiqi by Ypoq; and multiply the quotient by 100, In general this formula answers the question : “What would be } the given period list of goods when valued at base-period Prices of the value : The difficulty in computing the Paasche index in Practice is th: f weights, or quantities, must be computed each year or each Period at revised the data collection expense in the preparation of the index, For thecting to the Paasche index is not used frequently in Practice where the Re ne commodities is large. mber of Comparison of Laspeyres and Paasche methods. Laspeyres index change in a “fixed market basket” of goods and services. The same quantit are used in each period. The Paasche index continually updates the quantities to the levels of current consumption. These two approaches tend to produce opposite extremes in index values computed from the same data, From a practical point of view, Laspé@yres index is often preferred to Paasche's for the simple reason that in Laspeyres index weights (qo) are the base year quantities and do not change from one period to the next. On the other hand, the use of Paasche index requires the continuous use of new quantity weights for each period considered and in most cases these weights are difficult and expensive to obtain. In most countries index numbers are constructed by using Laspeyres formula. an Interesting property of Laspeyres and Paasche indices is that the ae is generally expected to overestimate or to leave an upward bias hee latter tends to underestimate , i.e., shows a downward bias. When ares . increase there is usually a reduction in the consumption of those bie ie which the increase has been the most pronounced and aaa that have year quantities we will be giving too much weight to the Pte too large increased the most and the numerator of the Laspeyres index ference to those When the prices go down, consumers often shift their prefe eriod weights items which have declined the most and, hence by using base Ping sufficient in the numerator of the Laspeyres index we shall not Pea weight to the prices that have gone down the most ae i Se on goods whet again be too large. Similarly because people tend to spen' sighing produces 4 their prices are rising the use of the Paasche or current we: Povo 2 gowns mmModities With oy Tre; At commodities with Cure, Measures index which tends to underestimate the rise in prices, Le. es index m! bias. But the above arguments do not imply that Laspey™ : necessarily be larger than Paasche’s. git in 1 eee eee use it * This ‘is after German statistician Hermann Paasche who 17% ton of Meat He is known for the Paasche Index which provides a ‘and phil index. Paasche studied economics, agriculture, statistics University of Halle, Germany.Taken plies Dedwer thet Ae Vea nd tty \ VUE Tato Tie ell ge ieee eave VANE GLY CSU TH gabon Ae Tipit eves (ype HES He enetii Ale Heo papain tha Ditty. Nhe Daaaelie (ge distin cane nity | Abbi vin tpl Wott vty avatlable Gates Ue peti OOTP SEEAE UCT ENG Tene vedi bea opengl Ya UO Thea Hay aid Hy Ay Cty iiteyenad APATE TE AEEN OAT GENE TE Uooe (idieoe Fadl time fortunrita Chey cai be canipatied Becdttine tn dtyat s mane Dee veal welghibe Gad Bun the Vedmenie rata ts Histially Hot tsesE andl the Eanpens Teasanis of ths pr ae deability Wyre taste x Met Dorbiath and Hawley tare aot Che Owe tidices (haapeyres ane sso as to take into aeeonnd the tithes eurrent as Well as base periods Me facile. tn \gweated Vana hel oh Toth hve COT OC gE p An Laspeytes Index, Ph Paas Ne tudes. Yew Spun 5 Rn Xray Sava er’s ‘Ideal’ Index. Prot. Irving Misher** Nas given a niiiber ot e for constructing index number and ot these he oaths one an the ex. The Msher’s Ideal Index is given by the formate Yi. Spun Leow Yeon Shoo Po. = S100 or Ay VEE “shall be clear from the above formula that Wisher's tdeal tides ta the “etre mean of the Laspeyres and Paasche tullees. Thus tie the Maher s “hod we average geometrical formulae that err ii oppostic directions above formula is known as ‘Ideal’ because ol (he tollowtng teasoue | 2 itis based on the geometric mean which is (heoretteatly cousidered to be the best average for constructing Index numbers @ — K takes into account both current Year as well aa base year prices and quantities. (i “ wectisles both the time reversal test as well as the lactor reversal te It tg paps by Fisher.* that eee bias. The two formulae (Laspeyres and) Paanetie's) formula : ly the Opposing type and weight blasies are, ta the tileal | itself " Tossed. geometrically, Le, by an averaging process Chat ot | — of the m7 No bias. The result is the complete cancellation of biases , Pop Inds revealed by time reversal and factor reversal tests Proof : le See under “Tests of Adequacy of Index Numbe 4 octal cont 857-1947) was an American economist, atatiaticlan, invertor } Compaigner, : >tay however, a practioal index to compute at vs Phe data, pardeutarty tor the Paasche sep Decarine ; x \ available In practice, statisticians with contin TW OL the | exe rough perhaps tess exact, tadex number tormulae Nue to rely tna : | " : 1 ©) Marshall Belgewworth Method. In this method ate Pon as well as base year prices and quantities are consign the ‘dere d. The | constructing the Index ts Po. on opening the brackets Y Pi (dot a) yi E po (qo +g, ) * 100 > y *~Pidot & piqy Por : ~ x » podo + ¥ pod 100 It is a simple, readily constructed measure, giving a j 7 a ver r | to the results obtained by the {deal formula, 8 A very close Appr, (wd Kelley's Method. Truman Lee Kelley* has 5 : formula tor constructing index numbers iy SuBBested the Por = xP! 100 iD pod Here weights are the quantites which may refer to some necessarily the base year or current year. Thus the average quantity ea more years may be used as weights. If in the Kelley's formula the © ve the quantities of two years ee as weights, the formula becomes Averag _ = Pid ; where q = 204% F poq x 100; where q= 2 Similarly, the average of the quantities of three or more years can be ys as weights. This method is known as fixed weight aggregative index and \, currently in great favour in the construction of index number series, Ay important advantage of this formula is that like Laspeyres index it does noi demand yearly changes in the weights. Moreover, the base period can be changed without necessitating corresponding change in the weights. This ‘s very important because the construction of appropriate quantity weights for a general purpose index usually requires a considerable amount of work Weights can thus be kept constant until new census (or other survey) data become available to revise the index. Illustration 5. Construct index numbers of price from the following data by applying 1, Laspeyre's method 2. Paasche's method 3. Bowley's method 4. Fisher's Ideal method, and tr Por 5. Marshall-Edgeworth method. Commodity 2010 a Quantity Price Quantity Price 6 A 20 8 40 5 8 50 10 60 15 . 40 15 2 25 D 20 20 Unie [B.Com. (H), Detht Univ., 2011; MBA: fe statis * Kelley (1864-1961) was highly influential in the introductio methods into psychological studies. ax anes ; CALCULATION OF VARIOUS INDICES 2010 ] 2011 pa Oe |e On ee yp om a 20 8 40 6 320 60 240 ‘ 50 10 60 5 600 50 300 7 40 15 50 5 750 «©6600 750 . Ao 00 or a0 a = Ina - = 21D .. 100; where Sp:qp = 2070, Lona = 1660 - aspeyr’s Method Pot = Sn, Soq= 2070, Lon = 1660 _ 2070 100 124. 1660 * 00 = 124.70. Pot Log > paasche's Method: Pot = pp, * 100 where Ip:0: = 1790, Long: = 14 1790 =a =121.77 Por 7470 * 100 12 Lorgo | Leg q.Bowley’s Method: Pot = y, Fp _ TPO 499 . 1660_ 2 2 o y 7 17 4 Fsters ideal Method : Poy = \{ 22® x 2PM 100-7) 2070 170 Ypoq0 LP0% 1660" 1470 = V1.525 x 100 = 1.235 x 100= 1235 5. MarsnallEdgeworth Method : Por = SAE x 2070+ 1790, — = 4660+ 1470 ~~ cmiton. From the folowing data construct 2 pce ndex number of Mates by using the appropriate formula macy Base Year Current Year Price per unit Expenditure (Rs) Prce perunt = Expenature Rs. e 2 40 5 A 4 18 8 5 ' 10 2 2 5 25 10 6 Nitin, Since M.Com. Kumaun Unis. 2004: PEL 2006: B.Com. (Hi, Jamia Miia Lr. 2012 Pee a We are given tne base year and current year pices and expendture wa shall be most appropriate ~ Rs 15 40 kg. RS. 16 600 wa Rs. 10 10 It Rs. 15 10 EV= 1,300 = TPV _ 1,59,000_ ,,, =P SV 1,300 This means that there has been a 22 5° per cent increase in pn (od) INDEX NUMBER USING GEOMETRIC MEAN OF PR Commoaity Dee V Pp Suga’ Rs. 30 Rs.40. 600 ‘123. Four Rs. 15 Rs. 16 Le Rs. 70 Rs. 15 100 150 YV=1,300 — = Antilog 2.084 = 1 | 2709.47 | Antilog |7300 | The result obtained Dy anpiying the Laspeyres method would come out obtained by weighted arithmetic mean of price relatives methos {as shown be jaw} Por — Antiiog PRICE INI i Commodity a Suge 20 kg Fou 40 kg. =< 10 tt = =p 7530 por = LEB x 199 = 1820. 100 = 122.31 Lp0ge 1300 a The answer is the same as that obtained by weighted arithmetic eanibe cha metros. This is because the weighted average of price relative method © simple aggregative method (given by Laspeyres) as follows : pr sh =m PP sm Taq pq = the $8 When tne trensformed formula (weighted average of price relative) ie we ti wergtec aggregatve of actual pnoes, the question arises as t0 wy epon memos o constructing index numbers. The transformation 'S bas' necessamy alweys present 7 that the arithmetic mean is being used ; and 2 tat bese year values are used as the weights. / ff tmese two conditions are not present, then the orig . Susceptible to transtormation in this wey Moreover, sometimes ! nex rympes Dy Combining easting index NuMmmEes Since the data in this case—~ 5 diffe’ formula 'S inal umberne untransformed formula involving relatives must be used, and the ot applicable weighted average price relative method for still another reason of relatives method. Because computing the average of price relatives es for each single commodity, we develop series of price 5 th Nhe ave’ ativ 7 te the price re Pe oes can be studied and analysed in themselves. these senee the quantities of two years as weights. compute a using the average of 9. BY Quantity Price in 2016 Price in 2017 ono" 2016 2017 (Rs) (Rs.) 10 16 20 25 A 9 7 25 28 5 20 24 40 40 . COMPUTATION OF PRICE INDEX USING AVERAGE OF THE TWO-YEAR QUANTITIES AS WEIGHTS memodl rantity Quantity (go>. q:\ Price in Price in zproty UE in 2017 | 2 2016 ©2017 w a Sq ¢ Po pr pq Pog 10 16 13 20 25 325 260 9 a 8 25 28 224 200 20 - i22\ae oO noe 880 880 . a ~ Sprig = 1,429 Smog = 1,340 scphing Kelly's method pot = 21 ¥ 400, where Zprq= 1,429, Zpoq = 1.340 id poq is 1,429 _ por = F'gqq * 100 106-64. Merits of Weighted Average of Relative Indices The following are the al advantages of weighted average of relative indices over weighted regative indices : a When different index numbers are const ‘aves method, all of which have the same base, ™anew index. a an index is computed by selecting one item from each of the many Rie items, the values of each sub-group May be used as weights. He ve method of weighted average of relatives is appropriate. ive fr new commodity is introduced to replace the one formerly used. ye or the new item may be spliced to the relative for the old one, ws ter value weights. ¢ rice 7 the ce or quantity relatives for each single item in the aggregate are, emselves a s} nselves a simple index that often yields valuable information for analysts. ructed by the average of they can be combined to Being Wary TY OR VOLUME INDEX NUMBERS 1 of the price of certain measure the physical Though price indices ly significant as ts of it. wi quantity. tee measure and permit comparisor a © of Production numbers, on the other hand, Miata Widely Nn, construction or employment. TS Of the 1 used, production indices are hight level of output in the economy or in par =index numbers, the prot constructing quantity tint ian are analogous to those involved in price inj? changes In quanuties, and when we weigh we use prices ae ices Quantity indices can be obtained easily by changing p to ; v various formulae discussed above. : qa ¥ G1Po When Laspeyre’s method is used Qo. = a x 10 e Taopo * 100 When Paasche's formula is used Qo1 = £1P1 ehoo 240P1 Qo1 = Zap = : ZqoPo ” Yaop, * 106 These formulae represent the quantity index in which th, OP) different commodities are weighted by their prices. H © quantit suitable weights can be used instead. - Tlowever, an, ion 10. From the following data, compute a quantity index: When Fisher's formula is used Iustratl Commodity Quantity 2016 “2017 can A 30 25 ee B 20 30 ° c 10 15 ee 20 Solution. COMPUTATION OF QUANTITY INDEX Commodity qo n Po g1P0 ~ A 30 25 30 750 a B 20 30 40 1,200 800 c 10 15 20 300 200 5 Xaqipo = 2,250 Laqopo = 1.900 - 2110 2,250 1 = 100 =~ = Sqopo * 100 F'gq9 * 100 = 118.42 th ref lus compared to 2016 the quantity index has gone up by 18.42 per cent in 2017 llustration 11. Compute by Fisher's In below : mpute by Fisher's Index Formula, the quantity index from the cata ov" ee Price Value Price Value A 10 100 8 oe 8 16 96 14 oe 12 36 10 “ (B. Com., Punjab U Solution. Sin . dividing value figures & given the value and the price we can obtain quantty Formula. y price for each commodity. We can then apply Fisner Commedy TATION OF QUANTITY INDEX BY FISHER'S METHOT A a a we 8 ‘ee 8 120 +100 © % - oe 6 14 412 96 9% S._i9 4398 Sp MN 2H tape a = adits price and quantity. gen year divided by . The forma therefore ts false index Gren period and both and quantity are variable in the numerator. ‘have to be applied since they are inherent in the value figures. i ues. It measures the change in = Z Te wine madex is not m wide use. although because of the unsatisfactory indices, it has been occasionally suggested that ue index The temptation. however, must be and quantity level answer questions urthermore, an aggregate of 2 product of 2 price level and a quantity level. The ue inte its price and quantity factors may be i not create any confusion of thought as e two factors and consistent. that the product of the price and quantity indices ‘STS OF ADEQUACY OF INDEX NUMBER FORMULAE wlae have been suggested for constructing index numbers and the 's that of selecting the most appropriate one in a given situation. wing tests are suggested for choosing an appropriate index. Test.* * Tne Reversal Test “tor Reversal Test Fant Williams Modern Business Statistics SCR was a Profesor Emeritus at Artaona State and was « member of Association of America. aeThy, 2 est requires that the formuls Test ‘The unit tes It I nula f 1, ats nou he independent of the units: in which, or fo ne vyartities. ae quoted. Except for the simple (unweigh ides all other discussed in this chapter satisfy this ' tes) rete Whic ted : h formulae Ky L 2. Time Reversal Test — prof. Irving Fisher has made ; the various proposals for computing index numbers 4 various tests to be applied to any formula to indicate whether o. 2 satisfactory. ‘The two most important of these he calls the t ! test and the factor reversal test. time 4 ‘Time reversal test Is a test to determine whether a given me both ways in time, forward and backward. In the words of Fisher! that the: formula for calculating the index number should be such tha The ter’ the same ratio between one point of comparison andl the other, no ine i wy , of the two ts taken as base." In other words, when the data for ae a are treated by the same method, but with the bases reversed, the d should be reciprocals of each other so that their following relation should be satisfied ; Poi X Pio=1 where Po; is the index for time “1” on time “O" as base and p,, index for time “0” on time “J" as base. If the product is not uniy i is said to be a time bias in the method. Thus if from 2016 to we price of wheat increased from Rs. 1920 to Rs. 2560 per quintal ime Ne price thod Wi Wo ing, bers secures inde numbe i prodyn unity. Symbolically, the 1 in 2017 should be 1333 per cent of the price in 2016 and the price _ 2016 should be 75 per cent of the price in 2017. One figure is reciprocal of the other: their product (1.33 » 0.75) is unity. This obviously true for each individual price relative and, according to the tine reversal test, it should be true for the index number. The test is not satistied by Laspeyres method and the Paasche method» can be seen below : When Laspeyres method is used Ypid Pore <7 190 Podo Ypoq pido. Spo ied Pig= : Po XPlo=s_ Xe £1 and the test fs nol sit 10= Spiqy -OL* "9 Ypoqo” Epi When Paasche method is used 2p Lpod Po=soog 10=y 0 Se XPido Po. x Pig = SPE x pogo and the test is 1l satis! 1 Ypon Epido “eae here are five methods which do satisly the test 1. The Fisher's Ideal formula. ; Simple geometric mean of price relatives ; Aggregates with fixed weights. ' The weighte \ = welghts geometric mean of price relatives 1 5. 5 Marshrall-Edgeworth method | adnow Fisher's Ideal formula satisfies the test hot ee ——$<$<—_—_—- /Epid0 , 2Pid Pu Ypoqo Pod oQtoland1toO pil nie /Spoqi , Logo =x 191 P1940 Soo Pido , 2Pidi |, Spot , LPogo Spodo Lpoqi Lig = Lpigo Pig = 1. the Fisher's Ideal Index satisfies the test. rime. Le =\1=1 sal Test Another test suggested by Fisher is known as est. It holds that the product of a price index and the nould be usual to the corresponding value index. In the as each formula should permit the interchange of the giving inconsistent results, so it ought to permit prices and quantities without giving inconsistent result. itiplied together should give the true value ratio.” In is that the change in price multiplied by the change be equal to the total change in value. The total value , in a given year and the product of the quantity and total value = px q). The ratio of the total value in one = ioral value in the preceding year is a If from one year to : lo actor Reve and quantity could double. the price relative would relative 200, and the value relative 400. The total year would be four times the value in the first year. and po represent prices and q and qo the quantities G the base year. respectively, and if Po) represents Doth of the index numbers. Us satisfied only by the Fisher's Ideal Index. vr Oy =Pid =Pod) 4 SUP 0 Lqopr pay _ Lea (Epoqo)? Pogoy rl - jaitowing table gives the annual income of a worker and the nee uring 2009-2017. Prepare Index Number to show the ci A : ie teacher and comment on price increase 909 2010-2011 2012 2013-2014 2018 2016 2017 e000 42000 50000 55000 60000 64000 68000 72000 7500 9 aie yoo «120:«C*N4BCti«*DD «2D 408800 : INDEX NUMBER SHOWING CNANGES. {ion IN THE REAL INCOME OF THE WORKER, i ePrice Index No. Real Income Real income Index me) Number , 36000 = a * 100 = 36000.0 100.00 42000 120 ip. % 100 35000.0 97 22 jit $0000 145 a % 100 = 344827 96 74 vie 98000 160 argo. % 100 = 94975.0 95.49 op 60000 250 ae % 100 = 24000.0 66.67 oye 64000 320 A500 100 - 200000 55 56 2015 68000 450 eae x 100 = 154111 1 4198 ore 72000 530 veep X 100 = 13584.9 3774 aor 75000 600 TOMO 100 = 12500.0 94.72 ‘The method discussed above is frequently used to deflate individual values, value 16s vaue indices. Its special use is in problems dealing with such diversified things as rupee sale ‘upee inventories of manufacturer's, wholesaler's and retailer's income, wages and the like CONSUMER PRICE INDEX NUMBERS Meaning and Need fie consumer price index numbers, also known as cost of living index ih ie oe generally intended to represent the average change over tine . pane paid by the ultimate consumer of a specified basket of gouds ace ee The need for constructing consumer price indices arises of the cae general index numbers fail to give an exact idea of the effect asses of nge in the general price level on the cost of living of different aifereny People in different manners. Different classes of people consurme Not contnnea of commodities and even the same type of commodities are ample, the in the same proportion by different classes of people For Yates wide Consumption pattern of rich, poor and middle class people fe clase 3 Not only this, the consumption habits of the people of the er from place to place. For example, the mode of expenditure avision lerk living in) Delh erk of the same category living it ps us in determining the effect asses of consumers living in differer h an index is of great significance because ver wage is based on the cost of living in; most countries are adjusted in accord het salanes in price index It should be carefully noted that the cost of li, i : ndex ¢ the actual cost of living nor the fluctuations in the cost os other than the change in the price level: its object is fy _ consumers of a particular class have to pay more for a ¢¢ and services in a given period compared to the base perc tact clearly. the Sixth International Conference of Labour § mended that “the term cost of living index’ should be repj.,., circumstances by the terms ‘price of living index’. Cost of liv e “consumer price index.” At present, the three terms, na Bs index. consumer price index and retail index are in use in with practically no difference in their connotation. ‘ It should be clearly understood at the very outset that wwo ¢ representing two different geographical areas cannot be. h actual living cost of the two areas. A higher index for one another with the same period is no indication that living costs one than in the other. All it means is that as compared with the s have risen in one area than in another. But actual costs ; only on the.rise in prices as compared with the base period. bui a. actual cost of living for the base period which will vary tor different and for different classes of population. price: Utility of the Consumer Price Indices The Consumer Price Ind. of great significance as can be seen from the following: 1. The most common use of these indices is in wage negotiations an’ \- contracts. Automatic adjustments of wage or dearness allowance comp: of wages are governed in many countries by such indices. 2. At governmental level, the index numbers are used for wage pol policy, rent control, taxation and general economic policies. 3. The index numbers are also used to measure changing purch of the currency, real income, etc. 4. Index numbers are also used for analysing markets for p of goods and services. sit articulat 5 Construction of a Consumer Price Index The following «"° the constructing a consumer price index : js meal te , who! ‘j Decision about the class of people for whom the index absolutely essential to decide clearly the class of people index is meant, ‘e., whether it relates to industrial ae ofticers, etc. The scope of the index must be clearly define | when we talk of teachers, we are referring to primary tee Al 1 level teachers, ete., or to all the teachers taken cogethe the class of people it is also necessary to decide the geoe”> 7. 575 \ NUMBERS ‘ . index. Thus in the example taken above it is to be decided al a teachers living in Delhi are to be included or those we i é living nee ticular locality of Delhi, say, Chandni Chowk area, pa Karol Bagh, e fing familly budget enquiry. Onee the scope of the index is , conduc cd the next step ts to conduct a family budget enquiry covering ‘ uly Con group tor whom the index is to be designed. The object. of ie populate family budget enquiry is to determine the amount that an onde UO uily of the group included in the index spends on different ywerage (aensumpticn While conducting such an enquiry, therefore, the items ot oot commodities consumed and their prices are taken into ac- A The consumption pattern can thus be easily ascertained. It is Be that the family budget enquiry amongst the class of people to ie index series is applicable should be conducted during the base ee “The Sixth International Conference of Labour Statisticians held in piv in 1946 suggested that the period of enquiry of the family budgets ee base periods should be identical as far as possible. - " enquiry is conducted on a random basis. By applying lottery method same families are selected from the total number and their family budgets are ~ sruunized in detail. The items on which the money is spent are classified into certain Well-accepted groups, namely : + Food Clothing. Fuel and Lighting. House Rent Miscellaneous. cach of these groups is further divided into sub-groups. For example, the oad group ‘food’ may be divided into wheat, rice, pulses, sugar, etc. The commodities included are those which are generally consumed by people for show the index is meant. Through family budget enquiry an average budget * prepared which is the standard budget for that class of people. While obstructag the index only such commodities should be included as are not Subject to Wide variations in quality or to wide seasonal alterations in supply wd tor Which regular and comparable quotations of prices can be obtained. \W Obtaining "portant ar such Person the # price quotations. The collection of retail prices is a very and, at the same time, very tedious and difficult task because prices may vary from place to place, shop to shop and person to «l vriee Quotations should be obtained from the localities in which thelr ai ol People concerned reside or from where they usually make the collect PS. Some of the principles recommended to be observed in “OSt of | ‘on of retail price data required for purposes of construction of ving indices are described below : @ The te each ‘ail prices should relate to a fixed list of items and for each ‘tem, the quality should be fixed by means of suitable Specifications, ] Retait Prices should be If emg those actually charged from consumers. cutateq “SKEd to compute real wages, the real wage indices need not be eeprices should: be those actually harper el tne, should be faleen Enbe aeconiay i (Dp) Retail (ce) Discount un customers i i) Ina period of price control OF ratory hie, charged openly, such prices should be tate ; © Mey) controlled prices My ~ most difficult problem in practice ts lo follow problem of keeping the weights assigned and qualities i it Wile tu Und services constant with a view to chsuriig: that only i tna change 1s measured, TO conform to uniform qualities, the Ne ayy to draw up detailed descriptions or specifications of the 4 use of persons furnishing or collecting, the price quotations Since prices form the most important eomponent of E> considerable attention has to be patd to the methods of price the price collection personnel. Prices are collected usually by Fallen through mailed questionnaire or In seme cases Chronph publi ha The greatest reliance can be placed on the price collection ne bry agents as they visit the retail outlets selected and cotlect the Hough, However, these agents should be properly selected and teagan given a manual of instructions as well as manual of specitic fe be priced. Appropriate methods of price verification should be folln, teas, | ‘check pricing’ in which price quotations are verificd by meana of | Hie) prices obtained by different agents or ‘purchase checking in a Milica | purchases of goods are made Whiteley | After quotations have been collected from all retall outlets an aye for each of the items included in the Index has to be worked ie, averages are first calculated for the base period of the tidex and later lure month if the index is maintair ed on a monthly basis. ‘The method of ay nal the quotations should be such as to yield unbiased estimates of avery price as being paid by the group as a whole. This, of course, will depend tpn method of selection of retail outlets and also the scope of the Index | In order to convert the prices into Index numbers (he pieces or te relatives must be weighted. The need for weighting arises because the ili importance of various items for different classes of people ts not the same Fy this reason, the cost of living index ilways a welphited tides While conducting the family budget enquiry the nount spent on each commu by an average family is decided and these constitute the weights, Agente with the EOL thy, Ht, 10 shiny expenditure on the different items constitute the individual weigh! tie fe to the corresponding price relative and the percentage expendiine a" groups constitute the ‘group weight’. Method of Constructing the Index le After the above-mentioned problems are carclully decided he be constructed by applying any of the following, methods i Aggregate Expenditure Method or Apprepgative Method + 2. Family Budget Method or the Method of Weighted Relaliv' 1! § appl wt 1 Aggregate Expenditure Method When (his t!' Hod : a 0 quantities of commodities consumed by the partienlar Be™ ice! year are estimated which constitute the wetshl®wae ips for the current year are multiplied by the various arour base year and the aggregate expenditure “yeti commodities 1s obt ned. In a similar manner the es Saving those re multipled by the quantities of the base year yeu in for the base period fs obtained. The aggregate year 1s divided by the aggregate expenditure of =% ate : t i eh of the cur otient is multiplied by 100. Symbolically. wear and index ¥ pigo Price tne’ ~ © odo consumer » Laspeyres method discussed earlier. This method is the fact tne constructing consumer price inde pulat ‘method {01 i ct Method When this method is applied the family amily oe large number of people for whom the index is meant are gts of “hed ‘and the aggregate expenditure of an average family on lly studice estimated. These constitute the weights. The weights are gus tems » weights obtained by multiplying the prices by quantities se vane pogo). The price relatives for each commodity are obtained same ree relatives are multiplied by the value weights for each item es educt is divided by the sum of the weights. Symbolically PV Consumer Price Index = Sv re, P Pl. 100 for each item ; V= Value weights, ie.. poqo- Po s method is the same as the weighted average of price relatives method sussed earlier. should be noted that the answer obtained by applying the aggregate wnditure method and the family budget method shail be the same.* ustation 21, Construct the consumer price index number for 2017 on the basis of 2016 tte following data using (i) the aggregate expenditure method, and (ii) the family ye! method : ‘onmodiy Quantity consumed | Units | Price in 2016 Price in 2017 in coment | | As. : Paise | Rs. Paise : 6 Quintal =| Quintal | 5 75 6 2 a 8 Quintal =| Quinta’ 5 0 8 9 : 1 Quintal | Quintal 6 0 9 o A 6 Quintal | Quintal 8 0 10 6 4 Kg | Kg. | 9 0 1 50 1 Quintal | Quintal 20 0 18 u e and TOM the fe ‘ YH OF the | dllowing: yop Peyres method is the py Py nerator in both the methods are the same as can be same as YPV of the family budget method cit Pwhich ys nothing but pigo Winate : toy, "C0 both the Sy te method ts also the sameSolution. COMPUTATION OF CONSUMER PRICE INDEX “Gace 2016 = 100) BY THE AGGREGATE EXPENDITORE FoR Commo. Quantities Unit Price in 2016 Price in 2017 MET dity consumed Po Pr x 6 atl atl 5.75 6.00 P19 B 6 atl. ” 5.00 8.00 38.00 2 c + atl, : 6.00 9.00 ooo 5 D 6 atl. f 8.00 10.00 pas E 4 Kg. Kg. 2.00 1.50 eos : Voi Gl 20008 boa) ' — ae : =P190 . 174 Sings. m = LP x 100= & Consumer Price Index yy x 100 746.5% 100 = 118.77 CONSTRUCTON OF CONSUMER PRICE INDEX NUMBER FOR 20 (Base 2016 = 100) BY THE FAMILY BUDGET METHOD Commo- Quantities Unit Price Price pi - dity consumed in 2016 in 2017 p* 100 D Po Pp P A 6 Qt. Qt. 5.75 6.0 104.34 B 6 Qi. Qil. 5.00 8.0 160.00 Cc 1 Qt. Qtl. 6.00 9.0 150.00 D 6 Qt. il. 8.00 10.0 125.00 E 4 Kg. Kg. 2.00 1.5 75.00 F. 1 Qu. Qtl.__ 20.00 15.0 75.00 EPV _ 17,400 118.77 Consumer Price Index = SV 7 146: Thus, the answer is the same by both the methods. However, the reader should p aggregate expenditure method because it is far more easier to apply compared to tr: budget method. Illustration 22. Construct a cost of living index from the following indices, the being food 55, rent 20, clothing 15, fuel and lighting 15 and miscellaneous 5 : Year Food Rent Clothing Fuel and Lighting — Misce 2014 100 100 100 100 2015 105 104 98 100 2016 110 112 102 101 2017 112 115 105 103 Solution. __ CONSTRUCTION OF COST OF LIVING INDEX NUMBERS fe eOlo: L 2016 Items Weights Index Weighted | Index Weighted Index a Nou elatives | Nou | Relay No: 1. Food 55 105 | 5,775 | 110 8,050 i 2. Rent 20 104 2,080 412 2,240 1 3. Clothing 15 ba | 4470 | 402 | 1500 he 4, Fuel and Lighting 15 100 1,500 = 101 1,515 bes 5. Miscellaneous 51100 550-115 575_| Total) 110 Ee) 11,910 Cost of Living Index for 2015 = 11.75 = 103.41 eer579 6 11,910 _ 498.27 «tor 2016 = 110 Weg 12,180 _ 440.73 index tF 2017 = 110 uwnd vy ito the budgets of middle class families in Mumbai gave the An enau! Bh to aod Rent Clothing ~—Fuel Misc. on 35% 15% 20% 10% 20% 2500 2000 1400 400 600 _ oie) FS) 2850 2200 1498 500 960 ne) the cost of living figure of 2017 have taken place compared to 2016? in = CONSTRUCTION OF COST OF | LIVING INDEX on 2016 2017 Pl. 400 5 pi pW 2500-2880 114 35 3990 2000 2200 110 15 1650 1400 1498 107 20 2140 400 500 125 10 1250 600 960 160 20 ———-3200 - os DW=100 SPW= 12,230 ZPW _ 12,230 _ 4593, Cost of living Index =Sw7 compared to 2016, the cost of living index has uation 24, In calculating cost of living index number, the weights used were : Rent 2, Clothing 3h, Fuel and Light 1 and Miscellaneous 2. Calculate the index lems in gone up by 22.3 per cent in 2017. cone! Frog 8 2 wterin the case of data where the percentage increases in the prices of the various ite prices of 2016 were 40, 75, 60, 35, and 80 respectively. ‘on CALCULATION OF INDEX NUMBER ams Percentage Index —— Increase I Ww 40 140 85 tin 15 175 2.0 _ 60 160 3.5 35 135 1.0 ———%_ 180 Cost of Living index = 2! ea late the ¢ ae Of Living Index Number using the weighted geometric mean NV Foog Index Number Weights 2) Fuel an 350 10 3 id light 19 Coting 150 2 a House tent 200 2 Miscellaneous 150 2 225 4 ~~CALCULATION OF COST OF LIVING » Solutio : fy ia ie . 350 10 2.5444 btn 150 2 2.1764 200 2 2 3010 150 2 2.1761 Mis 225 4 2.3500 LW=20 Cost of living Index = AL [¥ log (W/W, = AL [48.1562/20] = AL 2.4078 = 295 g Precautions while using Consumer Price Indices Quite sumer price indices are misinterpreted. Hence whil: the following points should be kept in mind 1. As pointed out earlier the consumer price index Measures ¢} retail prices only in the given period compared to base period. us anything about variations in living standard at two different sky the cost of living index for working class for Mumbai is 175 a i for the same period and for the same class of people it does no ' mean that living costs are higher in Mumbai as compared to Dell; 2. While constructing the index it is assumed that the bask change. However, as one moves away from the base Particularly ins of shortages, the basket itself undergoes a change and working oui the cost of buying the old basket may become unrealistic. Bur difficult task. The Sixth International Conference of Labour Sti recommended that the pattern of consumption should be examined weights adjusted, if necessary, at intervals of not more than ten correspond changes in the consumption pattern. The index also docs into account changes in qualities. Unlike changes in consumption changes in qualities of goods and services are more frequent and marked change in the quality of items occurs appropriate adjustments > : be made to ensure that the index takes into account changes in qua ~ But. in practice, it is a difficult proposition to follow and, therelore : qualities are assumed at two different dates which is a shaky as H 3. Like any other index the consumer price index is ba sed Te select While constructing the index sampling is used at very See fo of commodities, in obtaining price quotations, selecting a the budget enquiry, etc. The accuracy of the index thus hinges ie exe sampling methods. The consumption pattern derived io budget! data of a sample of households covered in the course of familly the | has to be representative of all the items in the average DUCES’ | 'roin which price data are collected have to be repr¢ > using ty ental { a ie roi which the population group makes purcha' " al} the rel “Lich prices are collected have to be represent FOr aitien! is oltet! patronised by the population group, etc. However. it perlect representativeness and in the absence of this (he the real picture, index falls