Learning Objectives
- Understand the meaning of the term index number.
- Become familiar with the use of some widely used index numbers.
- Calculate an index number.
- Appreciate the limitations of index numbers.
Index Numbers
Study Action Plan (Sorted by Difficulty)
Learning Objectives
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Revision Notes & Summary
TopChapter 7: Index Numbers
1. Introduction
- Understanding summary measures of change in related variables.
- Example: Price changes of commodities.
2. What is an Index Number
- A statistical device for measuring changes in related variables.
- Measures average change over two situations.
- Expressed in percentage terms with a base period (value = 100).
3. Construction of an Index Number
Methods
- Aggregative Method:
- Formula:
- Formula:
- Weighted Aggregative Method:
- Formula:
- Formula:
Examples
- Simple Aggregative Price Index:
- Example Calculation:
- Current Prices: 4, 6, 5, 3
- Base Prices: 2, 5, 4, 2
- Result: Price has risen by 38.5%.
- Example Calculation:
4. Some Important Index Numbers
- Consumer Price Index (CPI): Measures average change in retail prices.
- Example: CPI for industrial workers (2001=100) is 277 in December 2014.
- Wholesale Price Index (WPI): Used for measuring inflation.
- Index of Industrial Production (IIP): Measures production changes in the industrial sector.
5. Issues in the Construction of an Index Number
- Purpose clarity: Value vs. volume index.
- Data reliability: Use reliable sources.
- Base year selection: Should be normal and relevant.
6. Index Number in Economics
- Used in policy making (e.g., wage negotiation, inflation measurement).
- Importance of different CPIs for various consumer categories.
7. Conclusion
- Index numbers summarize changes in a large number of items.
- Importance in economic policy and interpretation.
Practice Test – MCQs, True/False
TopMultiple Choice Questions
A.
A decrease in the cost of living.
B.
An increase in the cost of living.
C.
No change in the cost of living.
D.
A decrease in purchasing power.
Correct Answer: B
Solution:
An index number larger than 100 in the context of CPI indicates an increase in the cost of living, necessitating an upward adjustment in wages and salaries.
Chapter Concept:
Consumer Price Index (CPI)
A.
Prices have increased by 150%
B.
Prices have increased by 250%
C.
Prices have increased by 25%
D.
Prices have decreased by 150%
Correct Answer: A
Solution:
An index number of 250 indicates that the prices are 2.5 times that of the base period, which means a 150% increase.
Chapter Concept:
Construction of Index Numbers
A.
It uses different units of measurement for different commodities.
B.
It provides a weighted measure of price changes.
C.
It accurately reflects the relative importance of items.
D.
It is used for calculating the exact price of individual items.
Correct Answer: A
Solution:
A simple aggregative price index is of limited use because it uses different units of measurement for different commodities and does not reflect the relative importance of items.
Chapter Concept:
Index Numbers
A.
The general price level has increased by 12.8% since 2011-12.
B.
The general price level has decreased by 12.8% since 2011-12.
C.
The general price level has increased by 112.8% since 2011-12.
D.
The general price level has decreased by 112.8% since 2011-12.
Correct Answer: A
Solution:
A WPI of 112.8 with base 2011-12 indicates that the general price level has increased by 12.8% since the base year.
Chapter Concept:
Wholesale Price Index (WPI)
A.
Laspeyre's uses current period quantities as weights, while Paasche's uses base period quantities.
B.
Laspeyre's uses base period quantities as weights, while Paasche's uses current period quantities.
C.
Both use the same weights but differ in calculation.
D.
There is no difference; they are the same.
Correct Answer: B
Solution:
Laspeyre's index uses base period quantities as weights, whereas Paasche's index uses current period quantities as weights.
Chapter Concept:
Index Numbers
A.
The cost of living has decreased by 50%.
B.
The cost of living has increased by 50%.
C.
The cost of living has remained the same.
D.
The cost of living has increased by 150%.
Correct Answer: B
Solution:
A CPI of 150 indicates that the cost of living has increased by 50% compared to the base year.
Chapter Concept:
Index Numbers
A.
The performance of 30 major companies and investor confidence.
B.
The average price of all stocks listed on the Bombay Stock Exchange.
C.
The total market capitalization of all listed companies.
D.
The economic growth rate of India.
Correct Answer: A
Solution:
The Sensex is a benchmark index for the Indian stock market, reflecting the performance of 30 major companies and indicating investor confidence.
Chapter Concept:
Sensex
A.
Laspeyre's index
B.
Paasche's index
C.
Simple aggregative index
D.
Weighted average of relatives
Correct Answer: B
Solution:
Paasche's index uses current period quantities as weights, making it suitable for determining the price rise for the current period basket consumed in the base period.
Chapter Concept:
Laspeyre's and Paasche's Index
A.
Current period quantities
B.
Base period quantities
C.
Average of base and current period quantities
D.
None of the above
Correct Answer: B
Solution:
Laspeyre's price index uses base period quantities as weights to measure how much expenditure would be needed in the current period to buy the same basket of goods as in the base period.
Chapter Concept:
Index Numbers
A.
CPI measures changes in retail prices, while IIP measures changes in production quantities.
B.
CPI measures changes in wholesale prices, while IIP measures changes in employment rates.
C.
CPI measures changes in employment rates, while IIP measures changes in retail prices.
D.
CPI measures changes in production quantities, while IIP measures changes in wholesale prices.
Correct Answer: A
Solution:
The Consumer Price Index (CPI) measures changes in retail prices, whereas the Index of Industrial Production (IIP) measures changes in production quantities.
Chapter Concept:
Index of Industrial Production (IIP)
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Index Numbers
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Locked • AI Weakness TrackerTrue or False
Correct Answer: False
Solution:
Paasche's index uses current period quantities as weights, not base period quantities.
Chapter Concept :
Laspeyre's and Paasche's Index
Correct Answer: True
Solution:
An increase in the Consumer Price Index (CPI) indicates that the cost of living has risen, necessitating an upward adjustment in wages and salaries.
Chapter Concept :
Consumer Price Index (CPI)
Correct Answer: True
Solution:
The simple aggregative index does not account for the relative importance of items, treating them as equally important.
Chapter Concept :
Construction of Index Numbers
Correct Answer: True
Solution:
The Sensex, or Bombay Stock Exchange Sensitive Index, is indeed a benchmark index for the Indian stock market. It consists of 30 stocks representing 13 sectors of the economy, and its movement reflects investor confidence.
Chapter Concept :
Sensex
Correct Answer: False
Solution:
The Wholesale Price Index (WPI) does not include items pertaining to services.
Chapter Concept :
Wholesale Price Index (WPI)
Correct Answer: False
Solution:
The IIP uses a weighted arithmetic mean of quantity relatives, not price relatives, to calculate the index.
Chapter Concept :
Index of Industrial Production (IIP)
Correct Answer: True
Solution:
The Wholesale Price Index (WPI) indicates the change in the general price level. A rise in WPI means that the general price level has increased.
Chapter Concept :
Wholesale Price Index (WPI)
Correct Answer: False
Solution:
The Wholesale Price Index (WPI) does not include items pertaining to services like barber charges.
Chapter Concept :
Wholesale Price Index (WPI)
Correct Answer: True
Solution:
A simple aggregative price index does not account for the relative importance of items, treating them as having equal weight.
Chapter Concept :
Construction of Index Numbers
Correct Answer: True
Solution:
The IIP is a quantity index that measures changes in the physical volume of production in the industrial sector.
Chapter Concept :
Index of Industrial Production (IIP)
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