12 INDEX NUMBERS Sis OBJECTIVES 42.1 INTRODUCTION Sa 422 MEANING OF INDEX NUMBERS | 123 PROBLEMS IN CONSTRUCTION of | 124 TYPES OF INDEX NUMBERS INDEX NUMBERS 425 METHODS OF CONSTRUCTING PRICI | Ett 126 UNWEIGHTED INDEX NUMBERS APEX NUMBERS 427 WEIGHTED INDEX NUMBERS | 428 CONSUMER PRICE INDEX (cp) 129 INDEX OF INDUSTRIAL PRODUCTION | 42.10 USES OF INDEX NUMBERS | 2.11 LIMITATIONS OF INDEX NUMBERS 12.12 WHOLESALE PRICE INDEX NUMBERS 4213 INFLATION AND INDEX NUMBERS ) 121 INTRODUCTION We are living in the fast changing economy. In dynamic economics, we see that there are continuous changes in the size of population, output, income, money supply, prices of commodities, etc. * Changes in the economy have their own impact on the level of economic activities, income and employment, general price level and so on. * We know that most values change and we are interested in knowing the extent of changes, which have taken place over a period of time. * Torexample, we may want to compare the average price level of different items of food in 2013 with what it was in 2002. * The changes in consumption, production, exports, imports, cost of living, national income, ide cine business failures and many other phenomena are studied with the help of index numbers. 12.4122 Statistics for Class Carli, an Italian Statistician, who constructed the first index number Hoa rare te pices of year 1760 wth that of yar 1500, 38 early ag 12.2 MEANING OF INDEX NUMBERS ____ oo An index number is @ statistical device for measuring changes in the magnitude Tamm 7 related variables. © Index numbers measure the changes with respect to time, geographical location sens other characteristics. The comparison may be between categories such as penone schon hospitals ete: it also measures the changes in the value of variables like prices of specifi is commodities, volume of production in different sectors of an industry, Production of various agricultural crops, cost of living etc. Index numbers are known as ‘Barometer of Economic Activity’ as they are used to feel the sul of the economy. eee Aliso ull aed In the words of Edgeworth, “Index number shows by its variation the changes in a magnitude | which is not susceptible either of accurate measurement in itself or of direct valuation in practice.” In the words of Tuttle, “An index number is a single ratio (usually in percentage) which measures the combined (i.e., averaged) change of several variables between two different times, places | or situations”. In the words of Croxton and Cowden, “Index numbers are devices for measuring differences in the magnitude of a group of related variables”. In the words of Spiegal, “An index number is a statistical measure designed to show changes in variable or a group of related variables with respect to time, geographical location or other characteristic”. Features / Characteristics of Index Numbers The various features of Index Numbers are: 1, Index numbers are specialised averages: Averages like mean, median or mode can be used to compare two or more series. However, if the units in which two or more series are expressed are different or if the series are composed of different types of items, then averages cannot be used to compare them, In such cases, index numbers help us in comparing change in Series, 2, Index numbers are expressed in percentages: The changes in magnitude of a group are expressed in terms of percentages which are independent of the units of measurement. This facilitates the comparisons of two or more index numbers in different situations. However, percentage sign (%) is never used.~ ee i ' on pers measure the effect Inde’ ‘mut Of changes in relation lace: Jocations, . nit lation to time or place: a ! Ee changes which take place over periods of time, in yn cost of living may be different at same two different places 10 Can be COMPATEG BCTORS Ivo perods of tie. = p , umbers measure the change not c: i sirectly. oe P ‘apable of direct measurement: Index i ee Man eae ° vy : example, COS! living cannot be measured in quantitative terms directly. We can only por mpanges init By studying the variations in certain other factors connected 10 LEMS IN CONSTRUCTION OF INDEX NUMBERS oa problems involved in construction of index numbers are: me or cost of WAT ees EM CONSTRUCTION Ciara acy of Index Numbers: There is no ‘All Purpose Index’. Every index has a limited and ific use oF purpose. + So, first step in the construction of index numbers is to ¢ of its construction. « Ifwe fail to decide the purpose of the index, then it would Jead to confusion, wastage of time and money. + For example, if we want to measure the changes in prices and we have collected data of quantity consumption, then it is of no use. ar: The base period associated with an index number is @ period ring changes in prices or quantities in a given period. das base period, the value of the index number arefully define and decide the LSelection of Base Ye of time that is used as a basis for compar + No matter what period of time is use for this period is always taken as 100. nds on the objective of index number. * The determination of base period primarily depe' * Guidelines for selecting a Base Period: The following points may guide in selecting, the base period: (i) The base period should bea normal one: The base period should be free from all sorts of abnormalities and irregular fluctuations like, wars, floods famines, earthquakes, economic booms and depressions, lockouts, labour strikes, etc. (ii) The difference between base year and current year should not be too large: Since index king and economic policies are often a matter numbers are helpful in decision mal ; of short period, we should not select a base period that is too distant in the past.iP, ' 124 Statistics for Class x (iit) Fixed Base or Chain Base: The selection of ‘fixed base method’ ot ‘chain base depends on the purpose of construction of index number. Methog: a In fixed base method, the period of comparison is kept fixed for tate years. rent a Inchain base method, the changes in prices for any given year are - with the prices in the preceding year, not with fixed year. ‘ompared However, the chain base method gives a better picture as compared to fixed inp method. Pare een ae ee aurea ‘A base period is the reference date from which an Index number Is calculated. Preseriiy, 2011-12 is taken as the base year in India. ‘The base year may be changed to reflect any changes over time in the composition of items making up the index. If base period is taken as 2011-12 and index number in 2015-16 ig 250, then it suggests that: * Prices increased by 150% on an average between 2011-12 and 2015-16; or * Same basket of goods in 2015-16 costs 1.5 times as much as in 2011-12, 3. Selection of number of items or commodities: The number of items to be included in an index number should be determined by the purpose for which the index is constructed. Every item cannot be included in the construction of index number. The following points may be helpful in the selection of commodities: (i) The commodities selected should be representative of the tastes, habits and customs of the people for whom the index is meant. (ii) The total number of items should be neither too small nor too large. 2 Ifthenumber of items is too small, then the index number will not be representative; and a Ifitis too large, the index will be more representative, but it will involve greater cost and time. (iii) The standardized or graded commodities should be selected to arrive at meaningful and valid comparisons. 4. Selection of sources of data: The data is scattered over a large area, so there are chances for its being misleading. Therefore, it is necessary that the data used should be reliable, accurate, adequate, comparable and representative. 5. Price Quotations: Prices of many commodities vary from place to place. So, Practically possible to collect price quotations from all places. + The places which are well known for trading of that particular commodity, can be selected for obtaining price quotation. Price quotations should be taken from the reliable sources, it is not eee‘i 2.5 selecting the source of * iy unbiased price voto Wotations, a8 wl of Price Quotations: There age” atid. : ate ' My Money prices: In this, prices ce two ‘methods, in which price can be quoted: @% 40 per kg. Woted per unit of commodity. For example, SUgAE iy Quantity prices: Quantity prj grams of sugar for one the ae quoted per unit of money. For example, 25 isi must also be made as tg ' ‘ ‘Whether the wha F . she choice would depend upon the pur ‘ a pen or retail prices are required. rices of certain commodit;, ; einael prices shold bea Are controlled by the government, then these nN ‘ a (not the black market prices, which may be much ejection of the Average: Different g seection OF ENE" Be t types of averages such as arithmetic mean, mode, redian, geometric mean, etc., can be used i is ere in preparing index numbers. + From the practical point of view, median and mode are not suitable because of their erratic limitations. « Basically, a ee has to be made between arithmetic mean and geometric mean: a Arithmetic mean is the most simple of all averages. But, it is affected by the extreme items. a Theoretically speaking, Geometric mean is the best average as it attaches more importance to smaller units and less importance to larger items. So, it isnot unduly affected by extreme values in the observations. 1 Selection of appropriate weights: The term ‘weight’ refers to the relative importance of different items. + The weights to be assigned to different commodities cannot be scientifically determined as importance of a commodity varies from consumer to consumer. « The weights can be either quantity weights or value weights: 2 Quantity weights are appropriate when various commodities are attached importance according to the amount of their quantities used, purchased or consumed. a Value weights are appropriate when various commodities are attached importance according to the expenditure incurred on them. * There are two methods of assigning weights 1. Implicit weights: If commodities are: selected so as to include several varieties, then weights are said to be implicit. 2. Explicit weights: In case of explicit weights, some outward evidence or importance of various items in the index is give": ,_,..... | or for Class x) must be periodically revised in order to reflect the curren b « The weights fluctuations in price. + When all items are equally important, an unweighted index mimber is 8. Selection of an appropriate formula: Various formulae or methods have fide “ tisticians for constructing the index mumbers like Laspeyre’s inibeds Bowley’s method, Fisher's method, etc. method, Paasche’, ° However, no single formula can be said tobe appropriate for all types of index . The choice of formula would depend not only on the purpose of the Ng the data available. index on 124 TYPES OF INDEX NUMBERS There are various kinds of index numbers. These can be broad|y classified into three categor, Rashomon naa Wholesale Price Retail Price indexNumbers — index Numbers 1. Price Index Numbers: The price index numbers measure the general changes in prices between the current year and the base year. * General Price Index is used to measure the value of money. * Of all the index numbers, the price index numbers are the most important and are commonly employed in various economic and business contexts. + When percentage changes in prices are different for different commodities, then price index helps in representing these changes by a single numerical measure. * A price index may be a ‘Wholesale Price Index’ or a ‘Retail Price Index’, depending on the type of prices used, () Wholesale Price Index Numbers; It reflects the general price level for a group of items taken as a whole. In India, it is the most popular price index used in the business industry and policy market. It acts as an indicator of the rate of inflation. (It is discussed in detail later in the chapter). (ti) Retail Price Index Numbers: It reflects the general changes in the retail prices of various items including food, housing, clothing and so on. The “Consumer Price Index” is a Special type of retail price index, which is a primary measure of the cost of living ina country. (Consumer Price Index Numbers are discussed later in the chapter)x" 127 y ity Index Numb jyantity ers: The +” ind enable us to compar ha OF volume index numbers measure average change o 88 in physical quantity of goods produced, consumed oF » They canbe constructed by usin, bet IB both simp 4 Index Number can be easily detived adage ont method So, Quantity toq’s: 7 ice lex Numbers by interchanging, P’ + The indices of Agricultural prod are all Quantity Index Numbers, luction, Industrial Production, Exports, imports, etc. value Index Numbers: Value index 1 ; 5 stl ou of the base period. wumbers compare the total value of some period with the study of changes i : . ; vretal sales or peal ‘he otal valu (price x quantity) of production such as indices o or inventories, can be made by value index numbers. os METHODS OF CONSTRUCTING PRICE INDEX NUMBERS ____— qhe various methods of constructing price index numbers can be grouped under two heads: 1, Unweighted or Simple Index Numbers; 1 Weighted Index Numbers. joth of these methods of constructing index numbers are further classified as: \i) Simple Aggregative Method; (i) Simple Average of Price Relatives Method. Thedifferent methods of constructing the index numbers can be shown by following chart: METHODS OF CONSTRUCTING PRICE INDEX NUMBERS Unweighted or Simple Index Numbers | Simple Aggregative Simple Average Pree Weighted Aogogaive Weighted Average of Price | 128 UNWEIGHTED INDEX NUMBERS Inthe unweighted index numbers, ‘each item is supposed to have the same weight as no weight is expressly “signed to any item. Such index numbers can be constructed by the following techniques: () Sinn ‘, hod; Simple Aggregative Method; fi Simple Average of Price Relatives Method. {etus discuss each technique ane by n®-Statistics for Class x) 128 8 for Class x) ive Method of constructing index numbers. In this method, aggregate prices of Hi the sed d commodities in the current year ate expressed as a percentage of the aggregate al in the base year. The steps in the construction of such an index are: |;) Add up the current year prices of various commodities and denote by Zp1- Add up the base year prices of various commodities Ipy | Use the following formula: Por Bx 100 Simple Aggreas"! Where, Po = Index number of the current year, = Total of the current year’s price of all commodities. Epp = Total of the base year's price of all commodities. Examples 1, 2 and 3 will illustrate the application of the above steps. sple }, Construct index numbers for 2016-17 taking 2011-12 as the base year from the following data by Simple Aggregate Method: Price in 2011-12 P Pricein201617 Wheat %20/kg | 25g Rice %30/kg 240/kg Pulses T60/kg 780k “Sugar %30/kg @40/kg Solution: Construction of Price Index Year 2011-12 as the base year ‘Commodity Price in 2011-12 (9) Price in 2016-17 (2) es Pd) “a e) Wheat 20 BS a ‘Rice - 30° =e OO a a Suge 30 - Ome Epp = 140 Ep, = 185 Price Index for year 2016-17 with year 2011-12 as base 2p, 185 Por = +x 100 =——> x 100 = 192.14 2p 140 ‘The price index number (192.14) reveals that there is a net increase of $2.14% in prices in the year 2016-17, compared to the prices in the year 2011-12. Ans. Price Index Number = 132.14 ss -TCE f - f 12.9 os >. The following Are two sets of of retail in to retail Prices during 2001 "I prices ofa typical family’s shopping basket. The and 2007 men a Pron 2007 18 2 A 15, = 150 _ : 14 imple ~ ate the simple aggregate price index for 2997 using 2001 as the base year. elculation of Simple Aggregate Price Index ana 7 (ganoay Price (2) ] Price (®) oy 2007 (9) a 20 gona doze) 15 15 soto (1 KQ) 120 150 - pus 4009) 9 a “4 2 Epo = 162 Ep, = 199 price Index for year 2007 with year 2001 as base Poy = 2PL x 100 =~ x 10012288 Pp 162 The price index number (122.83) reveals that there is a net increase of 22.83% in prices in the year 2007, compared to the prices in the year 2001. Ans. Price Index Number = 122.83 Sample 3. Calculate the price index by first taking 2010as base y yearand then 2012 as base year: Price ®) 40 50 60 70 80 90 5j[o —— om | « 2100 = 125 F100 = 03.23 | - ; 2012 | 60 7, % 100 = 150 5 100 = 10000 ots 70 Fx 100 175 2x 1002 11667 aC 80 a x100= 200 S100 = 123.33 2015 90 100 = 225 100 = 15000 2016 95 3x 100 = 2375 Sx 100 158.33 Limitations of Simple Aggregative Method 1. It is influenced by the magnitude of the prices. It means, higher the price of a commodity, greater is its influence on the index number. + So, high priced commodities receive greater weightage than low priced commodities. * For example, if rice prices are relatively higher than those of wheat, then rice prices tend to influence this index relatively more than the prices of wheat. 2. Equal weights are assigned to every item in construction of this index. The relative importance of various commodities is not taken into account. * For example, items like pencil and milk are assigned equal importance in the construction of this index. + This limitation renders the index of no practical utility. 5. Prices of various commodities may be quoted in different units like rupees per quintal, rupees per litre or rupees per metre and so on. « Thus, the index is influenced very much by the units in which commodities are quoted and accordingly some of the commodities may get more importance because they are quoted in a particular unit.ie average of Price Relatives te price relatives of calculate P' of the current year #10) i divide the price of each ( ity in the © 0 commodity in current year by the Price in the fe ji) obtain the sum total of price relatives, ie, 5 (& : 1), 0 ii pivide rum total of the price relatives of all commodities by the number of comm : | z (B 10 Ww) Apply the formula: Po, = o ~ amples 4 and 5 wil illustrate the application of the above steps. gample 4. Construct an index for 2016-17 taking 2011-12 as the base by the simple average of ce relatives method: Pives (2011-12) 10 20 30 40 70 Prices (2016-17) 13 i 17 g Solution: Calculation of Price Index Number B 20 60 =—x 100 = 200 7 re 60 0 Sf | CU eee —x 100 = 175 D 40 a 40TR 12.12 Statistes for Cags x a( 1) 0 590 = 590. 147.60 Py toy ‘The price index number of 147.50 shows the increase of 47.5% in prices in the year 2016-17 ag to year 2011-12. ‘ans. Price Index Number = 147.50 Example 5. From the following data, construct an index for 2016 taking 2011 as base by Oe simple average of relatives method. Prices (2011) 7 : Prices (2016) = 2 Solution: 635 =n I 5 27 11. The price index numberof 127 shows the increase of 27%in prices inthe year 2016 as comparedio yeu’ 20 Ans. Price Index Number = 127,12.13 i le Average of Py ats! simp! Tice Relatiy e ex has the following advantages die ws vd * qe value of ie index is not atected by tne a method: ae ( quoted. The pt ce relatives ate Pie nitnbery in which prices of commod aie ts riginal units in which they are quoted, and, therefore, are ual importance is given to : ® teindex number. ach commodity and extreme commodities do not influence | sits of Simple Average of Price Relatives Method ;) Asit is an unweighted index, each price relative is given equal importance. However, in 0 ; + _™ gctual practice, a few price relatives are / : ‘ . More important than others. | Difficulty is faced with regard tothe selection of an appropriate average. a? WEIGHTED INDEX NUMBERS me yjetave noted that the index numbers discussed so far, gives equal importance to each item. owevel, while constructing weighted index numbers, rational weights™ are assigned to all or commodities in an explicit manner. Such weighs indicate the relative importance of items . commodities included in the calculation of an index. ints*: I is impossible to gi . i tte decision about the rational weights depends on the purpose ofthe index number and the nature of treconcemed data. Weighted index numbers can be constructed by two methods: (i) Weighted Aggregative Method; and (i) Weighted Average of Price Relatives Method. Weighted Aggregative Method "Under this method, weights are assigned to various items and instead of finding the simple aggregate of pres, the weighted aggregate of the prices are obtained. Sone ofthe important methods of constructing Weighted Aggregative Indices are: 1. Laspeyre’s Method 1 Paasche’s Method 4 Fisher's Ideal Method 4 Drobish and Bowley’s Method 5. Marshall Edgeworth Method - § Walsch’s Method 7. Kelly’s Method oF r, considering th Constructing weighted aggreg@ , ° scope of syllabus of Class XI, we will discuss the first three methods ted Index numbers.eee eet ee 12.14 Statist sakibiniaaa — SS Laspeyre’s Method Mr. Laspeyres in 1871 gave an weighted aggregated index, in which weights are representey byte quantities of the commodities in the base year. if the expenditure in the base * Ithelps in answering the question that, i year ona commodities was € 100, then, how much should be the expenditure in the nage ‘on the same basket of commodities. Petiog © Formula: Poy = 2P% x 100 Poo * Steps: The various steps involved are: 1. Multiply the current year prices (p,) by base year quantity weights (qy) and totai all such products to get 2p14o- 2. Similarly, multiply the base year prices (Po) by base year quantity weights (gy and obtain the total to get Zpoqo: 3. Divide Xp,qo by Zpoqo and multiply the quotient by 100. This will be the index number of the current year. Paasche’s Method The German statistician Paasche in 1874 constructed an index number, in which weights are determined by quantities in the given year. 3 * Ithelps in answering the question that, if the current periou basket of commodities was consumed in the base period and if we were spending % 100 on it, how much should be the expenditure in current period on the same basket of commodities. ° Formula: Pid Po, = x 100 © Seas * Steps: The various steps involved are: 1. Multiply the current year prices (p,) by current year quantities (q,) and total all such products to get p,q). 2. Similarly, multiply the base year prices (py) by current year quantities (q;) and obtain the total to get Zpyq). 3. Divide 2p,q, by Zpyq, and multiply the quotient by 100. This will be the index number of the current year, Fisher’s Method Prof. Irving Fisher has given a number of formulae for constructing index numbers and of these, he calls one as the ‘ideal’ index. The Fisher’s Ideal Index is given by the following formula:a T yes 12.46 y EXERT to eB Jo above formula, it is clear that Fisher's Ideal Indes ie the geometric mean of the Laspeyre ste indices. i 4 's method is an ideal metn The forms based on geomet mean, which considered tobe the best verag for constructing index Numbers; eae nate Ye tr cure yearquantos as wets. So, rca eas © jesociated with the Laspeye's and Paasche's indexes, : It satisfies time reversal test ang factor reversal test, 1 je. From the following data, calculate price index numbers for 2016 with 2011 as base sa 's Method, (ii) Paasche’s Method, (iii) Fisher’s Method. se aspeyre —- . [ae (2016) pedo | EPotr | EPG | EP 21,660, =1470 | = 2,070 | =1,790 W Laspeyre's Method | Py = 2 2070 499 = 124.69 oy = P85 100 = EE Poa, ! "Paasche's Method 1,790 = 121.77 Py = EB 409 Sn oe12.16 ae (iil) Fisher's Method Poy = 4/ Pte «2PM 100 Epo EPod .| 070 1.780 , $00 = [151895 « 100 = 1.2322 x 100 = 123.20 1,680 1.470 ‘Ans. (i) Laspeyre’s = 124.69; (i) Paasche’s = 12 ible, compute index numbers by: (j the data given in the following tal P' imbers by: (i Picea sher's ideal method: Laspeyre’s 1.77; (lil) Fisher's = 123.22. Example 7 method, (ii) Paasche’s method, (iii) Fi Construction of Price Index Numbers. “Base year Current year i er a Price (2) | Quantity | poo | Pot) | Pid Bia Po % Pr % | _A 10 30 2 | 50 | 300 — = 8 8) 45 10 25 120 200 | 150 (280 c 6 20 6 30 120 180 120 180 a) 4) 0 | 6 20 40 go 6010 ZPGo | EPo = EPGy EPG =580 | =960 = 690 = 1,180 (i) Laspeyre's Method Poy = 22190 100 = 0%, 109 = 118.965 PoMo 580 (ii) Paasche's Method p19 1,150 Por = og, * 100 =—= 100 = 119.71 09 0” 9.79 (ii) Fisher's Method Poy = 2140, 2P194 x 100 P00 EPodsie oe 690 a 1,150 - J x — = 580 "960 * 100 = rapes ans) LBSPEVTO' = 118.065; cy Je 8. Calculate the Price * 100. 0 11997 5 100 = 119.97 Ss 119.79; (0) Fishers = 119,37, 1247 wot{ger'sideal method: *Mmber by. (4 Fis Saas “Speyre’s method, (ii) Paasche’s method, "40 (2011-43) Te —— Vue |, iment Year B07) Prog Value en) (Total Expenditure) 3 300 | 10 100 : | 15 CE t 10 ci _ ution: incase of both the years, total value is given. So, we will have to first calcul quantity by . So, ave late the applying the following formula: Quantty = Value Price Construction of Price index Numbers = ee] Base Year r (2011-12) (2016-17) commodity, Price () | Quantity | Price(%) | Quantity | poqo | pod) -Pido «Gs Po % Py % A 2 100 Se e100 200 se 200 Ee co 8 8 9 10 to | 72m oma c 12 5 15 6 60 z= 8 = D 7 7 10 @ | # e = EPodo | EP —-EPGo EPA =e) =408 = 838 =870 | . (i) Laspeyre's Method Po, = 2190 x 100 - 535 x 100 = 140.42 Poo =) (i) Paasche's Method Py, = 2% x 400 Epo i) Fisher's Method Poy =| 2P1Mo y 2Ps81 x 100 eS Zpoo Poo (iy Peasche's= 139.70; Ans, () Laspeyre's = 140.42! 570 , 490 = 139.70 (535, 570 , 400 = 140.05 381 408 (i) Fisher's = 140.05.i. | 12.18 Statistics for Class x, Example 9. On the basis of the following information, calculate Fisher’s index number. ZPoGo | =Pody | | =1,360 | =1,344 =1,900 =1,880 Fisher's Index Number Poy =| 221% x 21H x 400 22090 Pos 1,900 1,880 = |= — x 100 = [1.953 x 100 = 1.3974 x 100 = 139.74 1,360 : 1,344 Ans. Fisher's Index Number = 139.74 UTE Te aa ees Value index numbers are very easy to calculate. Value is the product of price and oa ‘simple value ratio is equal to the value of the current year divided by the value of the year. If this ratio is multiplied by 100, we get the value index number. Symbolically: V = Ze x 100; Where, V is the value index number. Poo Such index numbers are not weighted as they do not consider both the price and q These index numbers are however not very popular, because the situation revealed by and quantities are not fully revealed by the values. quantity. pricea l nwbers 12.19 gied Average Of Price Relatives Mats w ie? i ‘i method, the price relatives for the base ices. Tes Price relatives ate mary net Year ate calculated on the basis of the ba re hese tte a4 UP and vd y PM Yt respective wight of he ites Pe bY the sum of Weights er ; Calculate price Telatives for the Current year ( eto) R; P, an dete ty , iply the price in th amend p PES Year (with weights gy to gt valu weighs nd denote itby W: jultiply the price relatives (R) wi i : ws - Je oo (R) with value weights (W) of each commodity and obtain its 4, Obtain the sum total of value ‘Weights to get SW; s. Apply theformula: Py, = sxample 10.Calculate the index numberby weighted relatives method from the following data jothe year 2016 with 2011 as the base year. A 80 5 7 6 8 4 c 42 2 = D 37 4 E 31 4 S F 15 e — ‘ a 64,000 91,000 75,600 18,500 15,500 6,000 ERW = 2,70,600_> Statistics for Clagg x Neighted Average of Price Relatives las p, _2AW _ 2,70,600 1 es tw 1,726 The index number of 186.77 shows the increase of 68.77 2011. = 186.77 “i ptee ne e208 noun Year Quantity or Volume Index Numbers As discussed earlier, quantity index number measures the average in enable us to compare changes in the physical quantity of goods prone, ona distributed. We can construct the following quantity index numbers an; ota a index numbers. alogous Price Index Numbers Quantity index eee Se ee Method Por = 32x 100 to: = 24x 109 Pid EqiPp | Laspeyre’s Method | Py; = 2 199 _ x 100 ° Pod EqgPy Paasche’s Method | Po, = 21%, 199 ay = 2A, sop Poa ZqoP; | | Fisher's Method 12.8 CONSUMER PRICE INDEX (CPI) Meaning Consumer Price Index reflects the average increase in the cost of the commodities ~— by a class of people so that they can maintain the same standard of living in the current ye 4s in the base year, * They are designed to measure effects of change in prices of a basket of goods and ai on purchasing power of a particular section of the society during any given (current) pe with respect to some fixed (base) period. * The consumer price index numbers are also known as: (i) Cost of Living Index Numbers; (i) Retail Price Index Numbers; or (iii) Price of Living Index Numbers,& 42.21 for Consumer Price Index for constructing const ny eet rhein frac tine umber nisesbcen geal ns . in a exok people on theit cost of living, Prices of various commodities consumed ifferer ifferent cl edie Of people consume diferent ype of commodities and even the same | we ae re Not consumed in the same proportion by different classes of people. __ganssmer price index numbers are constructed separately for diferent classes of people to study the ie ofr or fl in prices of diferent types of ‘commodities. | a the consumption pattern of rich, poor and midal 28 widely. Also, the " le class people varies / a |onsu nption habits of the people of the same class difr from place to place. For example, the pattern of expenditure of a peon living in Delhi may differ widely from that of another pon iwing in, $y, Kerala. The consumer pric index helps us in determining the effect of rise and fall in prices on different classes of consumers living in different areas. ~ construction of Consumer Price Index The steps involved in construction of consumer price index are: 1, Determining the scope and coverage of the Index: The first step is to decide the particular . lass of people, for whom the index numbers is intended, such as industrial workers, government employees, low income or middle income class people, etc. * In addition to the class of people, the coverage should also be clearly earmarked, i.e. the geographical area - rural or urban, city or town, etc. * Itis necessary that the selected class should form a homogenous group of people from the point of view of income and habits. rv Family Budget Enquiry: The next step is to conduct a family budget enquiry by randomly selecting a sample of adequate number of representative families from the class of people, for whom the index is designed. * The enquiry should be conducted in a normal period of economic stability, * Family budget enquiry helps in finding out how much an average family of this group spends on different items of consumption. * Commodities are broadly classified into following 5 major groups: (i) Food, (ii) Clothing, (iii) Fuel and Lighting, (iv) House Rent, and (v) Miscellaneous. * Each of these major groups are further sub-divided into smaller groups termed as sub- groups, For instance, the group ‘Food’ may be sub-divided into cereals, pulses, milk and milk products, fruits, vegetables, etc. -12.22 Statistics for Clags x, | further, so that, the commodities * Usually, these sub-classes are divided still included in at sub-group are individually mentioned. But, only those commodities, which a mes, are included in the index number. group generally consumes, 3, Obtaining Price Quotations The thitd and the last step is to collect retail prices, * Itisa very important and difficult task. The reason is that retail prices vary from place to place, shop to shop and even customer to customer. * There cannot be one formula for collecting the prices, but still, the Sollowing broad principles may be observed: (i) The retail prices should relate to a fixed list of items and for each item, the quality should be prefixed by suitable specifications. (ii) Retail prices should be those actually charged from consumers. (iii) Discount for cash payment and interest rate for payment should b= taken into account. . (iv) Ina period of rationing or price control, where illegal Prices are charged openly, such prices should be taken into account along with the controlled prices. * Since prices form the most important component of cost of living indices, considerable attention has to be paid to the methods of price collection and to the price collection . * In order to convert the prices into index numbers, the prices or their relatives must be weighted. The need for weighting arises because relative importance of various items for different classes of people is not the same. For this reason, the cost of living index is always a weighted index. CE ede Prices are collected usually by special agents or through mailed questionnaire or in some cases through published price lists. ‘Special agents are more reliable as they visit the retail outlets and collect the prices from them. However, these agents should be properly selected and trained and should be given a manual of instructions as well as manual of specifications of items to be priced. How the prices can be verified? ‘The prices can be verified by methods like ‘check pricing’ or ‘purchase checking’. * Under ‘check pricing’, price quotations are verified by means of duplicate prices obtained by different agents. * In case of purchase checking’, actual purchases of t goods are made. Difficulties in Construction of Consumer Price Index 1. Prices used in the construction of cost of living index are retail prices, which vary from shop to shop, place to place and consumer to consumer. Therefore, index numbers prepared on such prices cannot be used for different places or different classes of people.12.23 ns les SO many = jnclud 'Y COMMOdities of on > gint of time. ble quality, which will not be used at different tio of expenditu 5 a aot in ve commodities at different point of time and by various bers. Yes difficulties in constructions of cost of living index mere will be variety of cost of | living indi " Hees depending upon region , STOMP, etc. of Constructing CP| community Y ite Expenditure ‘) Ageresa! Method or Weighted A, : ‘i dget Meth« Bgregate Method; 4 Family Budget Method or Method of Weighted Average of Price Relatives. got Expenditure Method is similar to the 2 _qismethd is similar to the Laspeyre's method of constructing weighted index. To apply this method, gates of commovies consumed by the particular inthe base year are est _gatbese figures are used as weights, Then, the total expenditure on each commodity for each ear 008 and current) are calculated. thesteps involved in this method are: 1, Multiply prices of the base year (p,) with quantities of the base year (qq) and add it to get aggregate expenditure for the base year (Ep)qo); 2, Multiply prices of the current year (p,) with quantities of the base year ( and add it to quan ye obtain aggregate expenditure of the current year (Zp1q9); 3, Divide aggregate current year’s expenditure (2p1qo) by aggregate expenditure of base year (Spyqg) and multiply it by 100 to get consumer price index number. 4. Apply the formula: Consumer Price Index = pe «100 ti Family Budget Method : , lathis method, the family budgets of a large number of people, for whom the index is meant, are ‘aefully studied. Then, the aggregate expenditure of anaverage family on various commodities ‘estimated. These values constitute the weights. Thesteps involved in this method are: P, F 1x1 \d denote it by R; |. Calculate price relatives for the cet ye( Po : w) a i tity in the base year (qp) to calculate 2 Multiplying the price in the base Ye=" bg Sel ve ae the weight of a commodity, ie: t0 get WiI ie Statistics for Clas, x 3. Multiply the price relatives (R) with weight (W) of each commodity and ota get RW; obtain 4. Obtain the sum total of weights to get £W; 5. Apply the formula: Consumer Price Index = “y4~ Itshould be noted that aforesaid both the mettods of constructing consumer pica index ruber wag provide the same results. Fxample 11. Calculate cost of living index, for the following data, using aggregate expenditure and family budget Method. Prices (in %) 2011 2016 | _ 10 15 | ar 8 12 | c 20 24 a = 32 40 5 e 15 20 6 = 12 18 2 a a 8 10 1 Solution Aggregate Expenditure Method Commoaty Prices (in®) ict ah 5r- AON —— 2016 | Peto ”~ B. Py 4% A 10 15 18 150 a 8 12 20 E 100 c 2 | 1 200 a > | 5 | 100 _:£ | 16 me % Ff oe 2 * G 8 | 1 1 : wv I = | xpgag= 792 Psd0= 107! Consumer Price index for the year 2016 = Pd, 199° LOU 100 = ‘72 * 100 = 135.22eee 45 | \ ; ee 150 15 150 22,500 ‘ ow 180 2 160 24,000 5 | 10 10 200 24,000 . | = | 40 4 : ete ws 160 20,000 E13] | 139.39 6 0 12,000 ee ee 8 oa 125 Tie 1,000 : —T LAW = 1,07,100 Consumer Price Index (CP) forthe year 2o1e Sine ome : ERW _ 1,07,100 2 = 195, mw 792 % tnshows that there is an increase of 35,299 in 7 Prices in the 116 as compared to year 2017 ‘Ans. CPI by Aggregate Expenditure and F; nee mm ‘amily Budget Method = 135.22 ample 12. Compute the index number using: i) Aggregate Expenditure Method, (ii) Family Budget Method, for the year 2016 with 2011 as the base year, from the data given below: Quantity (in units) 2011 | Price (@ 2011 Price (2) 2016 A 100 8 12 B 25 6 70 c 10 a D 20 E 25 Fté<~*t*té‘CSéC‘SO Solution: Aggregate Expenditure Method Prices (3) Commodity 2011 2016 Po Pr A 8 12 a 7.50 cf 5 | C525 a oe 3. 50 ee 16.5 F 9 caConsumer Price Index for the year 2016 2% « 100 _ 3702.50, 490 = 1.4219 x 100 = 142.13 2,605 Family Budget Method 8 800 6 750 —_—*125.00 25 150 18750 pe eeoes 105.00 10 Ee ‘320 era 108.33 20 9601.09.06 0 15 16.50 110.00 25 375 “1250 9 27 300.00 30 270 L 81,000 2W = 2,605, ERW=370246a0 Consumer Price Index for the year 2016 = FAW. _ 370,246.80 _ 149.43 =Ww 2,605 The consumer price index number of 142.13 shows the increase of 42.13% in prices in the year 2016 as compared to year 2011. ‘Ans. CP! by Aggregate Expenditure and Family Budget Method = 142.13. Uses of Consumer Price Index (CP!) Number The importance of the consumer price index can be seen from the following points: 1. Consumer price index numbers helps in wage negotiations, formulation of wage policy price policy, rent control, taxation and general economic policy formulation. 2. The government and business units use the consumer price index numbers to regulate the Dearness allowance (D.A.) or grant of bonus to the employees in order to compens!* them for increased cost of living due to price rise. purchasing 3. The CPI are used to measure purchasing power of the consumer in rupees. The ear. The power of the rupee is the value ofa rupee ina given year as compared toa base y¢ formula for calculating the purchasing power of the rupee is: 1 Purchasing Power. = ——_———___— x Consumer Price index 100 Itindicates that money purchasing power is the reciprocal of the price index. Accordingly if the consumer price index for a given year is 140, then purchasing power ofa rupees(an i a 12.27 1x 100 = 0.71 . Thatis, the 0 Purchasi Jexgared tothe base you ' Power ofa rupee inthe given year is 71 paise as fh with the ‘increase in Prices, the (or the real Wages) goes on, decreasi Of goods and services which money wages can buy Real wages can also be determin, NB: Index numbers tell us the change in real wages. low’ amount 5, Consumer price index numbers * sf goods and services, Ate also used for analysing markets for particular kinds calculation of Real Wages _ fsample 13. During a certain petiod, the | daily wages of a Worker was also raiseq ifso, by how much in real terms, Cost of living index goes up from 110 to 200 and the from ® 80 to € 125. Has the worker really gained, and Solution: \ith increase in cast of living index from 110 to 200, the daily wages ofthe worker shouldbe increased to: 80x200 | 10 = 7145.45. However, the daily wages have gone up only to 125. Hence, the worker has not gained. In fact, his real wages have gone down. The real wage ofthe worker is a. 26875as compared to % 80 before the price rise. All india Consumer Price Index Numbers. InIndia, three Consumer Price Index Numbers (CPI's) are constructed: 1. CPI for Industrial Workers with 1982 as base year. It is published by Labour Bureau, Shimla. 2 CPlfor urban non-manual employees with 1984-85 as base year. Itis also published by Labour Bureau, Shimla. 3. CPI for agricultural labourers with 1986-87 as base year. Itis published by Central Statistical Organisation. They are routinely calculated every month to analyse the impact of changes in the retail price On the cost of living of these three broad categories of consumers. AlIndia Consumer Price Index Numbers are given in Table 12.1: .564 364 611 611 672 673 750 751 2014-15 276 251 B00 ae ‘Source: Economic Survey 2015-2016. 12.9 INDEX OF INDUSTRIAL PRODUCTION — Index numbers of industrial number of industrial pro ction have become fairly common these days. The index measure changes in the level of industrial production comprising many industri © They measure the quantity of production in the area of manufacturing, mining and utilities They measure the overall change in the total volume of industrial production. at1 i | wet aia a nslaiceseE 12.29 puring @ given period, 8 m / reduction in the output OF ther nde mms in the output of some industries and index numbers of industrial she level of industrial Produae tion are designed to measure increase of dectease in nina Bi vent period, compared to some base period. This index isa quantity index and not a i . vali in the quantity of production a id thew ae it measures changes nd not in, lly, data of i Generally 'ndustral production are collected under the following heads: Copper, aluminium, petroleum, ete. . Mining Industries — Coal, iton ore . Metallurgical Industries — tron and steel, rolling mills, ete. . Mechanical Industries — Locomotives, ships, aeroplanes, etc. . Textile Industries — Cotton, Woollen, Jute, silk, etc. 5. Industries subject to excise duties — Sugar, match, tobacco, breweries, etc. .. Miscellaneous — Cement, Blass, soap, chemical, etc. The data relating to the production of the above mentioned industries are collected either monthly, quarterly or yearly, The steps involved in this method are: (i) Take base year’s production (qo) as 100 and express current ‘year’s production (q;) asa percentage of base year's production, i. calculate (2 10) ae kr ene qo (i) Multiply these percentages by the relative weights (W) and obtain its total to get = (= 10) w. 40 (ii) Apply the formula: o —x 100 (2-0) Index Number of Industrial Production = ay Chemical Production a 170 are = lucts 308 15 Text 220 —_—_____ Otindex Number of Industrial Production = ——— [i007 industrial production has increased by 60.20% in year 2016 Ans. Index of Industrial Production = 160.20 12.10 USES OF INDEX NUMBERS ses Index numbers are being extensively used to record changes in output, income, employment, productivity, business activities, etc. Index numbers are applied to measure variations in almost all spheres of economic activities. in the words of M.M. Blair, “index numbers are the signs and guide posts along the business highway that indicate to the businessman how he should drive or manage his affairs”. The following are the uses of index numbers: L Helg ~ormu/aton: Index numbers are indispensable tools for the management of any government or non-government organisation. * They help in studying trends of various phenomena and these trends and tendencies are the bases on which many policy decisions are taken. * They are also used in planning and formulating various government and business policies. 2. Index numbers oct as conomic Barometers: A barometer is an instrument that is used to measure atmospheric pressure. They measure the pulse of an economy and act as a barometer to indicate fluctuations in general economic conditions of a country. 3. Help in studying tends Index numbers are very useful in studying the trend or tendency of a series spread over a period of time. * They help to find out the trend of exports, imports, industrial production, prices and a variety of other phenomena.LL _ eS 14.31 + They al80 help it forge operation of any buen 8 the tutte trends, whieh very important for future rorerample, ta Production netivity af changee i the tices, parton sting, , ‘of the trend sn eR hy aon es ae eee er fomenstre and compare chithipes ariables. Index numbers hee in comparative changes in two + Itis not possible to Meastite relative measure to chy fa ine in absolute terms, But, index numbers provide a «The changes over time and © Magnitude of a Stoup of variables «nex numbers help to ae: Btaphic location can be easily compared i Z Purchasing power o on pe arom idee Purchasing power of maar Apead erhe eed te cha pon i 1 Pcs adverely fects the value of money. ‘ pees that a mips Fegan ale orpurchasing power ofmoney falls, Sometimes, : OF to is . 4 a power in 1980, 18 worth only 20 paise as compared to its purchasing oan Pfu in finding out the intinic worth of money as contrasted wit minal worth, Ths helps in formulating the wage policy of the country UO a ey Uae Mel La Suppose, a person used to earn 10,000 per in that year was 7 1,000. It ‘Means, the person month's earings, In the year 2016, the same Person earns % 20, Now, he cot Cl Li Tomektenee ed Month in the year 2005. The cost of an item | Sov purchase 10 units ofthe tem with ne | ,000 per month and cost ofthe item is ® 2,500. | Uuld purchase only 8 units with one month's. earnings. It means, the effect of ‘monthly earings relative to the particular item is less in year 2016 than in 2005 as lesser number of items can be purchased with Current earnings, Thus, a person who was earning % 10,000 in 2005, should earn % 25,000 in 2016, to maintain the standard of 2005. This helps in formulating the wage policy of the country. Index numbers help in deflating various values: The Price index number helps to adjust Monetary figures of various periods for changes in prices, * For example, the figure of national income of a country is computed on the basis of the Prices of the year in question, However, national income at current year price does not Teveal the real change in the level of production of goods and services, * Inorder to know the real change in national income, these figures must be adjusted for Price changes in various years. Such adjustments are Possible only by the use of price index numbers and the process of adjustment, in a situation of rising prices, is known as deflating. waPeeves ines Statistics for ¢ Has 12.32 12.11 LIMITATIONS OF INDEX NUMBERS os relative changes only Indexrnumbers re only 5 in various events. They ep approximate 1. Prc estimates of relative ch a cannot speak the truth as they are only the f iene They represent the generalised truth, which is obtained on the basis of average of all the items. Hence, it does not apply to individual units. 2 Lack of Perfect Accuracy: Quite often, index numbers are based on sample items, i.e., each and every item is not considered. If samples are inadequate or selected by erroneous method, index numb is bound to give inaccurate result. 3. Difference between purpose and method of construction: When an index number is constructed for a special purpose by a specific method, then such index number will not be appropriate for all other purposes and situations. If they are used for other purposes, it is bound to give erroneous inferences. 4. Ignores qualitative changes: While constructing the price or production index numbers, no attention is paid to the changes in quality of the product. An increase in price may be due to improvement in the quality of the product. Such changes are not reflected in the index numbers. 5, Manipulations are possible: Index numbers can be constructed in such a manner so that the desired result can be obtained. Such a manipulation can be done by choosing a particular base year, a particular group of commodities, a specific set of prices, etc. 12.12 WHOLESALE PRICE INDEX NUMBERS Wholesale price index numbers are those price index numbers which measure the general changes in the wholesale prices of goods in a country. * This index is restricted to commodities which are mainly traded on a wholesale basis like wheat, rice, edible oils, minerals etc, ° Wholesale price index numbers also act as an indicator of changes in economy. in India, the first wholesale price index number was compiled in 1947, The latest wholesale price index number in India is constructed with 2004-05 as the base year.42.33 tees i : tO ommodities for Wholesale Price Index (WPI) ' Ss we commodities traded on wholesale basis are broadly classified into followin’ three y pours ait 5 re Ae oe goods, which ate obtained by exploiting neat rice, pulses; fruits, vegetables, miner Inomber of iterns in this CateBOrY m8 and the weights are 22.02%, bhatt . - "articles: In this category petrol lectricity rere? : , goods like power, coal, Jeurn products, © , in fuel are included. The number of goods in this category is 19 with weightane oF alts ijactured Articles: It includes manufactured goods like sugat- edible oil, textile, jeather products, ‘ man . on ee paper and paper products, leather and them is 63.75% | The number of items of this group is 318 and weight given to . Jemeans that manufactured products have nearly is two-third importance in wrt Weights to Different Categories inary Articles ie 14.23% pergy Atticles vrufactured Articles 63.75% =a Weights 100% saiesale Price Index s the only price indexin india, ~yhichis available on weekiy basis with shortest 378 ‘oftwo weeks. Due to this reason, itis widely used in business and industry and by the ttis generally taken as an indicator of inflation rate in the economy. unity of Wholesale Price Index Number index number will become clear from the following, points: ‘Theutility or uses of wholesale price ation: Inflation is a pers e index is tal sistent and appreciable rise in general level of prices. In ken as an indicator of the rate of inflation. t which the purchasing power of money is 1 Indicator of Infl. economics, wholesale pric « An increase in WPI indicates the rate al decreasing. © WPI number helps in finding out the rate of inflation in the country, which can be calculated as: The weekly inflation rate is given by: Weekly Rate of Inflation = MMer x 100 tt {Where, X,and X_1 The yearly inflation rate is given by: wel of Current Year 499 Yearly Rate of Inflation = [ae of Previous Year * ~ 100 refer to the WPI for the t® and (t- 1)" weeks}1234 Site ro, x) 2. Forecasting Demand and Supply: The wholesale price indices are hetpfut in the demand and supply of the commodities in the economy. ‘orecaatng * An increase in wholesale price index indicates a situation of excess demand, * On the other hand, a decrease in wholesale price index shows a situation supply over demand for goods. ~ | d : WPI is used to elimi \' Helps in determining real changes in aggregates inate the . a . ~ has national income, capital formati ey of changes in prices on aggregates suc ition, etc, For example, an increase in the national income in a particular year may be by x \ same output is sold at a higher price. This can be known only when we divide nag, 5 \ income by the wholesale price index. * If the resultant value is the same as the base year, it would imply that the rea} utp has remained the same, or that there has been no growth in the economy. * On the other hand, if the resultant value is greater than that of the base Year, it that the economy is growing at that rate. 4 Useful in Cost Evaluation of various projects:Major projects like construction of an. Airport or Shopping Malls are long term activity where huge sums have to be spent in future. * The original estimated cost of project will be increased as prices rise over the time. * To estimate the revised price, the inflation rate has to be considered, which is indicated by the wholesale price index. * Wholesale price indices are useful in computing the real cost of such projects. * For example,if WPI for a year is 105, this means that initial cost estimate of thatyearwil =~ need an upward adjustment by 5%. : 12.13 INFLATION AND INDEX NUMBERS Inflation is described as a situation characterised by a sustained increase in the general price level. A small rise in prices or an irregular Price rise cannot be called inflation. It is a persistent and appreciable rise in prices, which can be called inflation, * The Wholesale Price Index (WPI) is the most widely used price index as an indicator of the rate of inflation in the economy, * It is the only general index capturing price movements in a comprehensive way and indicates movement in Prices of commodities in all trade and transactions. ° WPI is available ona weekly basis with the shortest possible time lag of 2 weeks. Due to all these attributes, WPI is the most commonly accepted measure of inflation.en | if Re ee ale = ction Ti performance ural vector. Is base period g : "ning a umber of agricultural 4 vor . | cro0s00 DY 79.5 Percent Over the ayeren”@® 178.5." means that agricultural production hae | 30° othe thee years 1979-60, 1960-61 and 1961-82. | ” ‘Sensex, Short form of the Bom) _Taaon Weihong of 39 co hang (BE) Sete nd, a maa | and financially sound companiag, " 4 sample of large, well-established “Festi coco concuaget 8 nen ad has ood ak "performance of the Indian stock markets, geno, n° des Widely used fo measure the | took markets. The base value of Sensex is considered to be the pulse of the Indian _$SE-Sensex is 1978-79, Sensor po 8 100 on Ape 1, 1970, andthe base yar of | cto, tincales tet 8 USO ie rivet inthe tock mare the + Fatrmance ofthe economy, rkstis doing wal andivestors are optimistic of the future | | | ‘Hiss | The Human Development Index (HDI) is an nga cong icrinettoaceesecaardamte) expectancy, Iteacy, educational atainment, and GDP per capita for counties worldwide. isclaimed asa standard means Of measuring human development. The basic use of HDIis to tank countries by evel of human , which aims to determine whether a country isa developed, developing, or underdeveloped country. “Producer Price Index” _ Producer Price Index measures the average change ofthe selling prices of the producers who | sall goods. To compute this index, the mean of all the changes over a year is usually taken. It | Measures the price changes according to the producer's perspective. It concentrates on the | area of industry based production and stage of processing based companies. 1, UNWEIGHTED INDEX NUMBERS 2, 1.1 Simple Aggregative Method Por = = 100 iff. 13) 12 Simple Average of Price Relatives pac Po ae N re 2 WEIGHTED INDEX NUMBERS 2.1 Weighted Aggregative Method P Laspeyre's Method : .12.36 Ipiay P,, « eh Paasche's Method Epa, * 1° \ Fisher's Method 2.2 Weighted Average of Price Relatives Method | Py, = 7 3 CONGUMERPRICENDEX Expenditure Method cP - B10 Aggregate *Po% 3.2 Family Budget Method ont =u 4. INDEX OF INDUSTRIAL PRODUCTION +( Elon) Index Number of Industrial Productions = -