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UNIT - 3
(INTRODUCTION TO INDEX NUMBER)

Introduction to index numbers

Points to remember
-- An index number is a statistical device for measuring changes in
the magnitude of a group of related variables.
* Features of Index Numbers
-- Index numbers are expressed in terms of percentages. However,
percentage sign (%) is never used.

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-- Index numbers are relative measurement of group of data.

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-- Index numbers offer a precise measurement of the quantitative
change in the concerned variables over time.

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-- Index numbers shows changes in terms of averages.
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* Types of Index numbers
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(i) Wholesale price index (WPI)
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(ii) Consumer price index (CPI) or

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Cost of living index

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(iii) Index of industrial production (IIP)

(iv) Index of Agricultural production (IAP)
.s

(v) Sensex
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w

* Methods of constructing index numbers

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Construction of Construction of weighted

Simple Index numbers Index numbers

Simple Simple Weighted Weighted

Aggregative Average Average of Aggregative
Method of Price Price Method
Relatives Relatives
Method Method

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-- Simple aggregative method :

Here, Po1 = Price index of the current year

P1 = Sum of the prices of the commodities in the
current year
Po = Sum of the prices of the commodites in the
base year.

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-- Current year : Current year is the year for which average

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change is to be measured or index number is to be calculated.

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-- Base Year : Base year is the year of reference from which
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we want to measure extent of change in the current year. The
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index number of base year is generally assumed to be 100.
es

-- Simple average of price Relatives method :

di
tu
.s
w
w

Here,
w

P o1 = Price index of the current year

P1 = Price relatives
x 100
Po
N = Number of commodities
-- Weighted average of price relatives method :

P o1 = RW
W

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Here,
P o1 = Index number for the current year
W = Weight
R = Price relatives i.e. P1
x 100
Po
-- Weighted Aggregative method
(i) Laspeyre’s Method :

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(ii) Paasche’s method :-

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da
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* Some Important Index numbers
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(i) Consumer price index (CPI) : CPI is

di

also known as the cost of living index, measures the average

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change in retail prices.

.s
w

* Methods of Constructing CPI

w

(A) Family budget method :

w

Here,

W = Weights
(B) Aggregative expenditure method :

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(ii) Wholesale price index (WPI) : WPI

Indicate the change in the general price level.
(iii) Index of industrial production (IIP) :
IIP is used to measure the relative increase or decrease in the
level of industrical production.

Here, q1 = Level of production in the current year

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qo = Level of production in the base year

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W = Weight

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(iv) Index of agricultured production (IAP) :
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IAP is used to study the rise and fall of the yield of principal crops
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from one period to other period.
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(v) Sensex : Sensex is the short form of Bombay stock exchange

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sensitive index with 1978-79 as base. It is the benchmark index

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for the Indian stock market. It consists of 30 stocks which represent

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13 sectors of the economy and the companies listed are the leaders
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in their respective industries.

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* Problems in construction of index numbers

(i) Purpose of index number
(ii) Selection of base year
(iii) Selection of items.
(iv) Selection of the prices of items.
(v) Selection of method of weighting
(vi) Selection of sources of data
(vii) Choice of an average.

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(viii) Choice of method.

* Uses of index numbers :

(i) To measure the purchasing power of money.
(ii) Knowledge of change in standard of living.
(iii) Adjustment in salaries and allowances.
(iv) Help in framing suitable policies.
(v) As economic barometers.
* Inflation and index numbers.

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-- Inflation is described as a situation characterised by a sustained

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increase in the general price level.

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-- Generally, inflation is measured in terms of wholesale price index.
-- Rate of inflation = A2 - A1 x 100
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A1
to
es

Here, A1 = WPI for week first (1)

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A2 = WPI for week second (2)

tu
.s
w
w
w

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VERY SHORT ANSWER TYPE QUESTIONS.

ONE MARK QUESTIONS

1. What do you mean by index numbers?

2. State two categories of price index jumbers.
3. Define base year.
4. Name the consumer groups for which CPI is computed.
5. What is price relative?
6. Give Laspeyre’s formula for weighted index number.
7. Where can we get some important index numbers such as CPI,

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WPI IIP etc.?

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8. Write the formula for calculating index of industrial production.
9. How many types of CPI are constructed in India?

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10. Define current year. da
11. What is the difference between simple index number and weighted
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index numbers?
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12. Give the formula to calculate the rate of inflation.

13. Which sign is used to indicate the price index number?
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14. What does wholesale price index indicate?

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15. Give Paasche’s formula for weighted index number.

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16. Which index number is known as cost of living index?

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17. Mention the weight of primary articles in wholesale price index.

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18. In how many groups all the commodities are classified for WPI?
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19. Mention the weightage of different groups in index of industrial

production.
20. Which index number is generally used to measure inflation?
21. Which change is measured in consumer price index?
22. Which item having the highest weight in CPI for industrial worker?
23. In which index number there is a relative importance of the items?

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SHORT ANSWER TYPE QUESTIONS.

3/4 MARKS QUESTIONS

1. State three difficulties of constructing index numbers.

2. What are the desirable properties of the base period?
3. Why do we need an index number?
4. Write a short note on inflation and index numbers.
5. Why is it essential to have different CPI for different categories of
consumers?
6. Mention the difficulties in construction of consumer price index.

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7. What is the difference between a price index and a quantity index?

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8. Define index number. State its utility.
9. What does an index of industrial production measure? Give formula

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to calculate IIP. da
10. Calculate price index number for 2004 taking 1994 as the base
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year from the following data by simple aggregative method:
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Commodities : A B C D E
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Price in 1994 (in Rs.) 100 40 10 60 90

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Price in 2004 (in Rs.) 140 60 20 70 100

.s

(Ans. 130)
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11. Construct an index number for year 2005 taking 2000 as the base
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year from the following data by simple average of price relative

method:

Commodities : A B C D E
Price in 2000 (in Rs.) 100 80 160 220 40
Price in 2005 (in Rs.) 140 120 180 240 40
(Ans. 122.32)

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12. Calculate weighted average of price relative index number of prices

for 2010 on the basis of 2004 from the following data :

Goods Weight Price 2004 (Rs.) Price 2010 (Rs.)

Wheat 20 20 35
Rice 12 15 18
Milk 8 10 11
Ghee 4 5 5
Sugar 6 4 5
(Ans. 139.4)

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13. Calculate price index number from the following data using
Laspeyre’s method:

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Commodity Base year Current year
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Price Rs. Quantity Price Rs. Quantity
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A 8 100 10 120
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B 4 60 5 80
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C 10 20 12 25
.s

D 12 25 15 30
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E 3 5 4 6
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(Ans. 124.44)
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14. From the data given below, construct Paasche’s price index:

Commodity Base year Current year

Price Rs. Quantity Price Rs. Quantity
A 4 2 6 3
B 3 5 2 1
C 8 2 4 6
(Ans. 69.84)

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15. An enquiry into the budgets of the middle class families in a certain
city gave the following information :

Expenses Food Fuel Clothing Rent Misc.

On items 35% 10% 20% 15% 20%
Price (Rs.)
in 2004 1500 250 750 300 400
Price (Rs.)
in 1995 1400 200 500 200 250

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What is the cost of living index during the year 2004 as compared

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with 1995?
(Ans. 134.49)

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16. From the data given below construct the consumer price index
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number :
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Commodity Price Relatives Weights

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Food 250 45
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Rent 150 15
.s

Clothing 320 20
w

Fuel and lighting 190 5

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Miscellaneous 300 15
w

(Ans. 253.5)

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LONG ANSWER TYPE QUESTIONS.

6 MARKS QUESTIONS

1. Explain the problems involved in the construction of index

numbers.
2. Discuss the various uses of index numbers.
3. Discuss the features of index numbers.
4. Give the meaning of whole sale price index numbers. Discuss the
utility of WPI.
5. Write short notes on :
(a) Base year

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(b) CPI

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(c) WPI

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(d) IIP da
6. What do you meant by index numbers?
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Discuss the importance of index numbers.
7. Calculate the cost of living index from the following data :
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Item Qty. consumed in Price per unit (Rs.)

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the given year Base year Given year

.s

Rice 2.5 qt x 12 12 25
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Pulses 3 kg. x 12 0.4 0.6

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Oil 2 L x 12 1.5 2.2

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Clothing 6 metres x 12 0.75 10

Housing 12 months 20 per month 30 per month
Miscellaneous Expenditure of 12 month 10 per month 15 per month

(Ans. 252.8)
8. Define consumer price index number.
Explain the uses of consumer price index numbers.

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ANSWERS OF ONE MARK QUESTIONS

1. An index number is a statistical device for measuring changes in

the magnitude of a group of related variables.
2. (a) Simple index numbers
(b) Weighted index numbers.
3. Base year is the year of reference from which we want to measure
extent of change in the current year.
4. There the three consumer group for which CPI is computed :
(i) CPI for industrial worker

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(ii) CPI for urban non manual employees

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(iii) CPI for agricultural labourers.
5. A price relative is the percentage ratio of the value of a variable in

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the current year to its value in the base year.
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to
6.
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7. Economic survey
di
tu

8.
.s
w
w

9. There are three types of CPI.

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(i) CPI (IW)

(ii) CPI (UNME)
(iii) CPI (AL)

10. Current year is the year for which average change is to be mea-
sured or index number is to be calculated.
11. In simple index number, all items of the series are accorded equal
weightage or importance but in weighted index number different
items of the series are accorded different weightage, depending
upon their relative importance.
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12. Rate of inflation =

Here, A1 = WPI for week first (1)

A2 = WPI for week second (2)

13.
14. WPI indicates the change in the general price level.

15.

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16. Consumer price index (CPI)

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17. 22.02 % (or) 22%

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18. Three
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19. Groups Weightage
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(i) Mining 10.47

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(ii) Manufacturing 79.36

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(iii) Electricity 10.17

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20. Wholesale price index number

.s

21. Retail prices

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22. Food
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23. Weighted index numbers.

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