CHAPTER-6

INDEX NUMBERS(4-5Q)
Index numbers:
It is a statistical tool that helps in comparing price of a commodity in 2 different time
periods (Base year and current year)

 Index numbers are expressed in terms of percentages

 Averages used for the Construction of Index numbers, are AM & GM
 GM is the best average for construction of Index numbers
 AM is the most commonly used average for construction of Index numbers

Price relative index number:

𝑃1
= x 100
𝑃0
where,
P₁ Current year Price
P0  Base year price
6.2:Classification of Index numbers:
6.2.1: Simple Index number:
6.2.1.1:Simple aggregative price Index:
σ 𝑃1
= σ 𝑃0
x 100
It is dependent on units

6.2.1.2:Simple Relative price Index:

𝑃1
σ
𝑃0
= x 100
𝑛
where, n  no. of Commodities

It is independent of units
Example 1:
Find (i) Simple aggregative & (ii) Simple relative price Index for the data given:
6.2.2: weighted Index numbers:
Here weight means quantity.
 Types of weighted Index number:
6.2.2.1: Laspeyre's Index (L):
It is also referred as wholesale price Index (WPI).
σ(𝑃1 𝑞0)
L=σ x 100
(𝑃0 𝑞0)

where, 𝑞0 is base year quantity.

6.2.2.2: Paasche's Index (P):
σ(𝑃1 𝑞1)
P=σ x 100
(𝑃0 𝑞1)
where, q₁ → Current year quantity.
6.2.2.3: Bowley's Index (B):
It is an AM of Laspeyre's & paasche's Index.
L+P
B=
2
6.2.2.4: Fisher's Index (F):
→ It is a GM of Laspeyre's and Paasche's Index.
→F= L×P
σ 𝑃1 𝑞0 σ 𝑃1 𝑞1
F= σ 𝑃0 𝑞0
× σ 𝑃0 𝑞1
x 100
→ Fisher's Index is an Ideal Index number.

6.2.2.5: Marshall's Index (M):

σ 𝑃1 𝑞0 + 𝑞1 σ 𝑃1 𝑞0 +σ 𝑃1 𝑞1
M= σ 𝑃0 𝑞0 + 𝑞1
x100 = σ 𝑃0 𝑞0 +σ 𝑃0 𝑞1
x 100

→ Marshall's Index is a good approximation to Fisher's Index.

Examples 1:
Find Marshall's & Fisher's Index for the data given:
Commodity p0 q0 p1 q1
A 2 74 3 82
B 5 125 4 140
C 7 40 6 33
Example 2:
If Laspeyre’s index is 128.4, paasche’s index is 180.4. Find fisher’s and bowley’s index

Example 3: Find Laspeyre’s and Paasche’s index for the following data
Commodity p0 p1 q0 q1

A 2 3 7 8
B 5 4 12 14
C 7 6 40 3
6.3:Consumer Price Index (CPI)
 It is also referred as cost of living Index.
 The CPI is a measure of average change in price over a given period of time the
consumer pays for the basket of goods & services.
 The CPI helps in finding the rate of Inflation.
σ 𝐼𝑤
 CPI = σ𝑤
where, I  group index
𝑃
I = 1 x 100
𝑃0
w  weight
6.4:Deflated value:
Deflation of value occurs when retailers & Service providers cut their costs & sell smaller
packages, give out smaller portions or generally provide less for the same price so as to
maintain the same sticker price.
current year value
Deflated value =
current year CPI
Note: Deflated value is not an index number
6.5.Splicing of Index numbers:
It means the construction of One Continuous series from series two different index
number on the basis of Common base.

6.6:Shifted Price Index:

original Price Index
Shifted price Index = x 100
Price Index of the year to which it has to be shifted

Example 1:
Shift the year from 2024 to 2010:
Year CPI
2010 120
2024 165
6.7:Chain Index number (CIN):
A chain Index is an Index number in which the value of any given period is related to the
value of immediate preceding period.

→ This is different from the fixed-base Index.

link Relative of current year × CIN of Previous year

CIN =
100
6.8: Purchasing power of Money :-
1
=
Price Index number
It is the reciprocal of price index number
 Lesser the price index number, greater will be the purchasing power of money.

6.9:Real wages:
current year wages
= x 100
current year CPI

 It is the wages used to compare with base year wages

Percentage increase in Real wages:

1+ % Increase in Price
= 1− x 100
1+% increase in wages

where,
% Increase in price is rate of inflation
Example 1:
The CPI goes up from 100 to 250 & the wages of is a worker also raised from 10,000 to
30,000. Find the real wages.

Example 2:
If with an increase of 10% in price, the rise in wages is 20% then the Real wages has
increased by
(a) 20 % b) 10% c) less than 10% d) more than 10%

Note:
% Increase in real wages will always be Less than the difference b/w % increase in wages &
% increase in price.
Example 3:
During a certain period the cost of living index goes up from 110 to 200 and the salary of
a worker is also raised from Rs.330 to Rs.500, then in real terms, the raise in salary is
effectively
a) Gain by Rs.50 b) Gain by Rs.75 c) Loss by Rs.90 d) Loss by Rs.50
6.10:Tests of Adequacy (Tests of consistency)
1. Unit test:
For any Index no. to pass unit test, it must be independent of units
 only simple aggregative Price Index doesn't satisfy unit test as it is dependent on units

2. Time reversal test (TRT):

Condition for satisfying TRT is P01 x P10 = 1

P
where, P01 represents 1 on 0 and P01= 1
P0
P0
P10 represents 0 on 1 and P10=
P1
It is satisfied by Fisher’s and Marshall’s index
3. Factor Reversal Test (FRT):
→ Condition for satisfying factor reversal test is
σ 𝑃1 𝑞1
P01 × q01 = v01 = σ 𝑃0 𝑞0
Where, v01 is value index of 1 on 0
→ only Fisher's Index Satisfies FRT.
4. Circular Test:
 Condition for satisfying circular test is P01 x P12 x P20 = 1
 Circular test is the extension of TRT
 Circular test is also called test of shifting the base
→ Fisher's Index fails to satisfy Circular test.
→ It is satisfied by Simple GM of price relatives & weighted aggregative with fixed weights.

6.11:To find the current year salary and Dearness allowance(DA) when Base year salary,
Base year CPI and Current year CPI are given:-

Note: If base year CPI is not given, then it is taken as 100

𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝑠𝑎𝑙𝑎𝑟𝑦 × 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝐶𝑃𝐼
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑠𝑎𝑙𝑎𝑟𝑦 =
𝐵𝑎𝑠𝑒 𝑦𝑒𝑎𝑟 𝐶𝑃𝐼

Dearness allowance= Current year salary – Base year salary

Example1:
Suppose a business executive was earning ₹ 2,050 in the base period, what should be his
salary in the current period if his standard of living is to remain the same?
Given σ 𝐼𝑤 = 3544, σ 𝑤 = 25
a) ₹ 2096 b) ₹ 2906 c) ₹ 2106 d) ₹ 2306

Example2:
The monthly income of an employee was Rs.8000 in 2014. The consumer price index
number was 160 in 2014, which rose to 200 in 2017. If he has to be rightly compensated,
the additional dearness allowance to be paid to him in 2017 would be:
a) Rs.2400 b) Rs.2750 c)Rs.2500 d) none of these
6.12:To find the current year CPI when Percentage increase/decrease in price is given:-
Example1:
With 2004 as the base year, the percentage increase in price from base period is 125%.
What is the Index number of prices in the year 2008?

Example2:
If the prices of all commodities in a place has decreased 20% in comparison to the base
period prices, then the index number of prices for the place is now.
a) 100 b) 120 c) 80 d) 150
Previous year paper problems:
1.The average of base year and current year is used in index number
(a) Laspeyre’s. (b) Paasche’s. (c) Fisher's ideal. (d Marshall-Edgeworth.

2.Which index number satisfies both the time reversal and factor reversal tests?
(a) Fisher's Ideal index. (b) Laspeyre's index.
(c) Paasche's index. (d) Marshall-Edgeworth's index.
3.Which of the following is not a test of adequacy in the context of index numbers?
(a) Unit test. (b) Square test. (c) Circular test. (d) Factor Reversal test.

4.Which of the following does not satisfy the time reversal test?
(a) Fisher's Ideal index and Laspeyre's index.
(b) Laspeyre's index and Paasche's index.
(c) Paasche's index and Fisher's ldeal index.
(d) Laspeyre's index, Paasche's index & Fisher's ldeal index.
5.If the prices of all commodities in the base year are twice the values of the respective
commodities in the current year, then the Fisher's ideal index number is equal to
(a) 200. (b) 50. (c) 25. (d) 400.

6.The gross monthly pay of an employee was Rs. 15,000 in a year 2020. The consumer price
index number in 2023 is 155 with 2020 as base year. If employee is to rightly compensate
what dearness allowance is required to be paid?
(a) Rs. 8,000. (b) Rs. 8,250. (c) Rs. 8,500. (d) Rs. 8,750.
7.An Index number constructed to measure the relative change in the price of an item or a
group of items is called
(a) Quantity index number. (b) Price index number.
(c) Volume index number. (d) Composite index number.

8.Fisher’s index does not satisfy following test.

(a) Unit test. (b) Time Reversal Test.
(c) Circular test. (d) Factor Reversal Test.
9.If the Laspeyre’s index is 110 and Passche’s index is 108, then what is the value of Fisher’s
index?
(a) 106.50. (b) 107.60. (c) 108.99. (d) 109.88.

10.From the year 2013 to 2023, Consumer price index number is increased from 135 to
180. During this period, salary of the employees as per day commission recommendations
was revised from Rs. 23,000 to Rs. 29,500. In real terms, an employee should get
followingadditional amount (upto nearest whole number) to maintain his previous
standard of living.
(a) Rs. 1,168. (b) Rs. 666. (c) Rs. 909. (d) Rs. 6,500.
11.From the following data constructed the index number by laspeyre’s method
ΣP1Q1 = 99, ΣP0Q1 = 76, ΣP0Q0 = 73, ΣP1Q0 = 96
(a) 130.36. (b) 131.51. (c) 130.59. (d) 76.01.

12.Which index measures the change from month to month in the cost of are presentative
basket of goods and services of the type bought by a typical household?
(a) Retail Price Index. (b) Laspeyre’s Index. (c) Fisher’s index. (d)Paasche’s
Index.
13.Fisher’s index number is called as ideal index number because is in satisfies.
(a) Factor reversal test. (b) Time reversal test.
(c) Both factor and time reversal test. (d) Circular test.

14.If Laspeyre’s Index is 119 and Paasche’s Index is 112. Then Fisher’s index number will be.
(a) 113.99. (b) 115.45. (c) 115.89. (d) 151.98.
15.In price index, when a new commodity is required to be added, which of the following
index is used?
(a) Shifted price index. (b) Splicing price index.
(c) Deflating price index. (d) Value price index.

16.The test of shifting the base is called

(a) Unit Test. (b) Time Reversal Test. (c) Factor Reversal Test. (d) Circular Test.
17.The Laspeyre's index number is a weighted aggregate method by taking __________ as
weights.
(a) Quantity consumed in the base year.
(b) Quantity consumed in the current year.
(c) Value of items consumed in the base year’s Tutor.
(d) Value of items consumed in the current year

18.Which one of the following methods is based on geometric mean for calculating an index
number?
(a) Fisher's method. (b) Kelley's method. (c) Paasche's method. (d) Laspeyre's method
19.Which one of the following test is not applied for selecting an index number?
(a) Time Reversal. (b) Price Relative. (c) Factor Reversal. (d) Circular.

20.Let po and p1 be the prices of a commodity in the base and current year respectively.
The price relative with respect to base year is
(a)P1/P0 (b) P0/P1 (c)P1-P0/P0 (d) P1-P0/P1
21.If P10 and P01 are index for 1 on 0 and 0 on 1 respectively then formula P01 x P10 = 1 is
used for
(a) Unit Test. (b) Time Reversal Test. (c) Factor Reversal Test. (d) Circular Test.

22. The weighted averaged of price relatives of commodities, when the weights are equal
to the value of commodities in the current year, yields_________index number.
(a) Fisher's ideal. (b) Laspeyres’s. (c) Paasche’s. (d) Marshall-Edgeworth.
23.Index numbers are not helpful in
(a) Framing economic policies. (b) Revealing trend. (c) Forecasting. (d) Identifying errors.