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.
It uses the base period quantities as weights.
B.
It uses the current period quantities as weights.
C.
It averages price relatives.
D.
It is unweighted and treats all items equally.
Correct Answer: A
Solution:
Laspeyre's Price Index uses the base period quantities as weights to measure price changes over time.
Chapter Concept:
Laspeyre's and Paasche's Index
A.
It does not account for the relative importance of different items
B.
It requires complex calculations
C.
It is difficult to interpret
D.
It is only applicable to a single commodity
Correct Answer: A
Solution:
A simple aggregative price index does not account for the relative importance or weight of different items, treating all items as equally important.
Chapter Concept:
Consumer Price Index (CPI)
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 decreased by 177%
B.
Prices have increased by 177%
C.
Prices have increased by 277%
D.
Prices have decreased by 277%
Correct Answer: B
Solution:
A CPI of 277 with a base year index of 100 indicates that prices have increased by 177% since the base year.
Chapter Concept:
Index Numbers
A.
Mining
B.
Manufacturing
C.
Electricity
D.
Agriculture
Correct Answer: D
Solution:
The main branches of the Index of Industrial Production are 'Mining', 'Manufacturing', and 'Electricity'. Agriculture is not included.
Chapter Concept:
Index of Industrial Production (IIP)
A.
The base year is 1980-81, and it is significant because it reflects the economic conditions of that time.
B.
The base year is 1978-79, and it is significant because it serves as a reference point for calculating the index value.
C.
The base year is 1990-91, and it is significant because it marks the beginning of economic liberalization in India.
D.
The base year is 2000-01, and it is significant because it represents the modern economic era.
Correct Answer: B
Solution:
The Sensex uses 1978-79 as its base year, which serves as a reference point for calculating the index value and comparing it with current market conditions.
Chapter Concept:
Sensex
A.
Primary Articles
B.
Fuel and Power
C.
Manufactured Products
D.
Services like barber charges
Correct Answer: D
Solution:
The Wholesale Price Index does not include items pertaining to services like barber charges, repairing, etc.
Chapter Concept:
Wholesale Price Index (WPI)
A.
The purchasing power of money has increased since 2001
B.
The cost of living has increased by 177% since 2001
C.
The cost of living has decreased by 23% since 2001
D.
The CPI measures wholesale prices
Correct Answer: B
Solution:
A CPI of 277 with a base year of 2001 indicates that the cost of living has increased by 177% since 2001.
Chapter Concept:
Consumer Price Index (CPI)
A.
It is the year when the index was first introduced.
B.
It serves as a reference point for measuring changes in production quantities.
C.
It determines the weight of each commodity in the index.
D.
It is used to calculate the average retail price of commodities.
Correct Answer: B
Solution:
The base year serves as a reference point for measuring changes in production quantities in the Index of Industrial Production (IIP).
Chapter Concept:
Index of Industrial Production (IIP)
A.
Core Inflation
B.
Headline Inflation
C.
Consumer Inflation
D.
Base Inflation
Correct Answer: B
Solution:
The 'All Commodities Inflation Rate' is often referred to as 'Headline Inflation'.
Chapter Concept:
Wholesale Price Index (WPI)
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Index Numbers
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Locked • AI Weakness TrackerTrue or False
Correct Answer: True
Solution:
The IIP is calculated using a weighted arithmetic mean of quantity relatives, with weights being allotted to various items in proportion to value added by manufacture in the base year.
Chapter Concept :
Index of Industrial Production (IIP)
Correct Answer: False
Solution:
Laspeyre's index uses base period quantities as weights, not current period quantities.
Chapter Concept :
Laspeyre's and Paasche's Index
Correct Answer: True
Solution:
The CPI is used to adjust wages and salaries to ensure that purchasing power is maintained despite changes in price levels.
Chapter Concept :
Consumer Price Index (CPI)
Correct Answer: True
Solution:
The Sensex, also known as the Bombay Stock Exchange Sensitive Index, is indeed a benchmark index for the Indian stock market, representing the performance of 30 major companies.
Chapter Concept :
Sensex
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:
An increase in the CPI reflects that more money is needed to purchase the same basket of goods, indicating a rise in the cost of living.
Chapter Concept :
Consumer Price Index (CPI)
Correct Answer: False
Solution:
The Consumer Price Index (CPI) measures changes in retail prices and cost of living, not the general price level, which is measured by the Wholesale Price Index (WPI).
Chapter Concept :
Index Numbers
Correct Answer: False
Solution:
The Consumer Price Index (CPI) measures changes in retail prices, not wholesale prices.
Chapter Concept :
Index Numbers
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: False
Solution:
Paasche's index uses current period quantities as weights, not base period quantities.
Chapter Concept :
Laspeyre's and Paasche's Index
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