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Aarambh 2.0 2024

Index Number DPP-03

1. Why are price and quantity index number 6. Name the major groups for whom the Consumer
constructed? Price Index numbers are constructed in India.

2. Simple average of price relative method of
computing index number suffers from certain
limitations. Enumerate those limitations.
3. Write any three uses of index number especially in
economics.
4. What methods are used for constructing consumer
price Index number?
7. What does the Consumer Price Index for Industrial
workers measure?
8. Give the formula to compute index number by
weighted average of price relative method.
9. Mention the formula for the construction of
weighted index number as given by Professor Irving
Fisher.

5. Which index number is used to calculate purchasing

power of money and real wage?
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Answer Key
1. (With Discussion) 6. (With Discussion)
2. (With Discussion) 7. (With Discussion)
3. (With Discussion) 8. (With Discussion)
4. (With Discussion) 9. (With Discussion)
5. (With Discussion)
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Hints & Solutions

1. (H & S)  p1q 0
Consumer Price Index =  100
Price index numbers are constructed to study  p0 q 0
the changes in the price levels of two time
(ii) Family Budget Method This method
periods. Quantity index numbers are
computes CPI on the basis of family
constructed to study the changes in the level
budget, using the given formula.
of output of two time periods.
 IW
Consumer Price Index =
W
2. (H & S)
This method is not affected by change in the
units of measurement or by extreme values. 5. (H & S)
However, it suffers from the following Consumer Price Index is used to calculate
limitations. purchasing power of money and real wage.
(i) This method also gives equal weights
to all the items and thus ignores their 6. (H & S)
relative importance in the group. The major groups for which CPI numbers are
(ii) This method uses arithmetic mean for constructed are enumerated below
computing average, which is not (i) The industrial workers
suitable for study of index numbers. (ii) The urban non-manual workers
(iii) The agricultural labourers
3. (H & S)
Uses of index number are 7. (H & S)
(i) Index numbers are helpful in A Consumer Price Index for industrial
measuring the purchasing power i.e., workers measures general inflation.
value of the money.
(ii) These numbers are used to measure
8. (H & S)
level of economic activities like import,
export, production, population, etc. As per this method,
(iii) These numbers are helpful in  IW
Index number = , Where
evaluating economic policy e.g., index W
number helps in knowing the effect of IW = Sum of products of price relatives and
export policy on export. weights
W = Sum of weights
4. (H & S)
There are two methods of constructing 9. (H & S)
Consumer Price Index number
 p1q 0  p1q1
(i) Aggregative Method This is the most P01 =   100
popular method for constructing  p0 q 0  p0 q1
Consumer Price Index number, and is
computed with the help of the
following formula.

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