Chapter 8 Index Numbers Solutions
Question - 1 : - An index number which accounts for the relative importance of the items is known as
(i) weighted index
(ii) simple aggregative index
(iii) simple average of relatives
Answer - 1 : -
(i) An index number becomes a weighted index when the relative importance of items is taken care of weighted index is the weighted average of different goods.
Question - 2 : - In most of the weighted index numbers the weight pertains to
(i) base year
(ii) current year
(iii) both base and current year
Answer - 2 : -
(i) In general, the base period weight is preferred in calculating the weighted index number but as per Laspeyre’s method it uses the base year quantity as weight, Paache uses current year quantities as weight and Fisher’s Index Method uses both base and current year quantities.
Question - 3 : - The impact of change in the price of a commodity with little weight in the index will be
(i) small
(ii) large
(iii) uncertain
Answer - 3 : -
(i) An equal rise in the price of an item with little weight will have lower implications for the overall change in the price ;ndex than that of an Item with more weight.
Question - 4 : - A consumer price index measures changes in
(i) retail prices
(ii) wholesale prices
(iii) producers’prices
Answer - 4 : -
(i) Consumer Price Index (CPI), also known as the cost of living index, measures the average change in retail prices which show the most accurate impact of price rise on the cost of living of common people.
Question - 5 : - The item having the highest weight in consumer price index for industrial workers is
(i) food
(ii) housing
(iii) clothing
Answer - 5 : -
(i) As weight and Fisher’s index method uses both base and current year quantities.
Food is given around 57% weight in CPI for industrial workers as it constitutes the major proportion of their total consumption.
Question - 6 : - In general, inflation is calculated by using
(i) wholesale price index
(ii) consumer price index
(iii) producer’s price index
Answer - 6 : -
(i) The WPI is widely used to measure the rate of inflation. The weekly inflation rate is given by
where X, and Xt-1 to the WPI for the (t)th and (t- 1)th weeks.
Why do we need an index number?
Answer - 7 : -
Index number enables us to calculate a single measure of change of a large number of items. The index numbers are needed for the general and specific purpose they are
- Measurement of Change in the Price Level or the Value of ‘ Money Index number measures the value of money during different periods of time as well as we can use it to know the Impact of the change in the value of money on different sections of society. It can be worked out to correct the inflationary and deflationary gaps in the system.
- Information of Foreign Trade Index of export and import provides useful information regarding foreign trade which helps in formulating the policies of export and import.
- Calculating Real Wages CPI are used in calculating the purchasing power of money and real wage as follows
- Purchasing power of money = 1/Cost of living index
- Real wage = (Money wage/Cost of living index) × 100
- Measuring and Comparing Output Index of Industrial Production (IIP) gives us a quantitative figure about the change in production in the industrial sector and thus helps in comparing industrial output in different periods. Similarly, agricultural production index provides us an estimate of the production index provides us an estimate of the production in agricultural sector.
- Policy Making of Government With the help of index numbers government determines the minatory and fiscal prey and take nassery steps to develop the country.
- Indicating Stock Prices Sensex and NIFT are index numbers of share prices on BSE and NSE respectively. They serve as a useful guide for investors in the stock market. If the sensex and nifty are rising, investors have positive expectations about the future performance of the economy and it is an appropriate time for investment.
Question - 8 : - What are the desirable properties of the base period?
Answer - 8 : -
Base period should have the following properties
- The base year should be a normal period and periods in which extraordinary events have occurred should not be taken as base periods as they are not appropriate for general comparisons.
- Extreme values should not be selected as base period.
- The period should not be too far in the past as comparison with current period cannot be done with such base year as policies, economic and social conditions change with time.
- Base period should be updated periodically.
Question - 9 : - Why is it essential to have different CPI for different categories of consumers?
Answer - 9 : -
The Consumer Price Index (CPI) in India is calculated for different categories as under
- CPI for industrial workers.
- CPI for urban non-manual employees.
- CPI for agricultural labourers.
The reason behind calculation of three different CPIs is that the consumption pattern of the three groups (i.e., industrial workers, urban non-manual workers and agricultural labourers) differs significantly from each other. Therefore, to assess the impact of the price change on the cost of living of the three groups, component items included in the index need to be given different weights for each of the group. This necessitates the calculation of different CPI for different categories of consumers.
Question - 10 : - What does a consumer price index for industrial workers measure?
Answer - 10 : -
Consumer price index for industrial workers measures the average change in retail prices of a basket of commodities which an industrial worker generally consumes. Consumer price index for industrial workers is increasingly being considered the appropriate indicator of general inflation, which shows the most accurate impact of price rise on the cost of living of common people.
The items included in CPI (Consumer Price Index) for industrial workers are food, pan, supari, tobacco, fuel and lighting, housing, colthing, and miscellaneous expenses with food being accorded the highest weight. This implies that the food price changes have a significant impact on the CPI.