Chapter 18 – Index Numbers

CA NISHANT KUMAR 1
Introduction
An index number is a ratio of two or more time periods, one of which is the base time period.
The value at the base time period serves as the standard point of comparison.
The base time period is that time period from which the comparisons are to be made. For
example, in 2009 the price of a McAloo Tikki burger was ₹20; in 2020, it’s ₹40. Now, if I need
to compare the price of 2020 with the price of 2009, 2009 will be the base time period, and
2020 will be current time period. The price in the base time period is denoted as P0 . The price
in the current time period is denoted as P1. The ratio of the price of the current period (2020,
i.e., P1 ) to the price of the base period (or reference period, i.e., 2009, i.e., P0 ), is known as the
P1
Price Relative, and is denoted as P01. Therefore, P01 = .
P0

Pn
Therefore, Price Relative = . It is expressed as a percentage as follows: Price Relative
P0
Pn
=  100.
P0

Additional Question Bank – Question 10

Price-relative has been expressed in terms of:
Pn P0 Pn P0
(a) P = (b) P = (c) P =  100 (d) P =  100
P0 Pn P0 Pn

Solution (c)

Additional Question Bank – Question 16

If the index number of prices at a place in 1994 is 250 with 1984 as base year, then the prices
have increased on average by:
(a) 250% (b) 150% (c) 350% (d) None

Solution (b)

Additional Question Bank – Question 15

If the prices of all commodities in a place have increased 1.25 times in comparison to the base
period, the index number of prices of that place now is:
(a) 125 (b) 150 (c) 225 (d) None
Solution (c)

CA NISHANT KUMAR 2
Additional Question Bank – Question 17
If the prices of all commodities in a place have decreased 35% over the base period prices, then
the index number of prices of that place is now:
(a) 35 (b) 135 (c) 65 (d) None

Solution (c)

Additional Question Bank – Question 42

The index number in wholesale prices is 152 for August 1999 compared to August 1998. During
the year there is net increase in prices of wholesale commodities to the extent of:
(a) 45% (b) 35% (c) 52% (d) 48%

Solution (c)

Additional Question Bank – Question 45

The price level of a country in a certain year has increased 25% over the base period. The index
number is:
(a) 25 (b) 125 (c) 225 (d) 2500

Solution (b)

Additional Question Bank – Question 46

The index number of prices at a place in 1998 is 355 with 1991 as base. This means:
(a) There has been on the average a 255% increase in prices.
(b) There has been on the average a 355% increase in price.
(c) There has been on the average a 250% increase in price.
(d) None of these.

Solution (a)

Additional Question Bank – Question 47

If the price of all commodities in a place have increased 1.25 times in comparison to the base
period prices, then the index number of prices for the place is now:
(a) 100 (b) 125 (c) 225 (d) None
Solution (c)

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Additional Question Bank – Question 48
The wholesale price index number or agricultural commodities in a given region at a given date
is 280. The percentage increase in prices of agricultural commodities over the base year is:
(a) 380 (b) 280 (c) 180 (d) 80

Solution (c)

Additional Question Bank – Question 49

If now the prices of all the commodities in a place have been decreased by 35% over the base
period prices, then the index number of prices for the place is now (index number of prices of
base period = 100)
(a) 100 (b) 135 (c) 65 (d) None

Solution (c)

Additional Question Bank – Question 77

The prices of a commodity in the year 1975 and 1980 were 25 and 30 respectively taking 1980
as base year the price relative is:
(a) 109.78 (b) 110.25 (c) 113.25 (d) None

Solution (d)

Additional Question Bank – Question 78

The average price of certain commodities in 1980 was ₹60 and the average price of the same
commodities in 1982 was ₹120. Therefore, the increase in 1982 on the basis of 1980 was 100%.
The decrease in 1980 with 1982 as base is:
(a) The price in 1980 decreases by 60% using 1982 as base.
(b) The price in 1980 decreases by 50% using 1982 as base.
(c) The price in 1980 decreases by 90% using 1982 as base.
(d) None

Solution (b)

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Additional Question Bank – Question 86
The prices of a commodity in the years 1975 and 1980 were 25 and 30 respectively, taking 1975
as base year the price relative is:
(a) 120 (b) 135 (c) 122 (d) None

Solution (a)

Simple Aggregative Method

Simple Aggregative Price Index =
 P 100
n

P 0

Additional Question Bank – Question 52

From the following data
Commodity Base Price Current Price
Rice 35 42
Wheat 30 35
Pulse 40 38
Fish 107 120
The simple aggregative index is:
(a) 115.8 (b) 110.8 (c) 112.5 (d) 113.4

Solution (b)

Additional Question Bank – Question 66

From the following data
Commodities Base Year Current Year
1922 1934
Price (₹) Price (₹)
A 6 10
B 2 2
C 4 6
D 11 12
E 8 12
The price index number for the year 1934 is:
(a) 140 (b) 145 (c) 147 (d) None

Solution (d)

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Additional Question Bank – Question 67
From the following data
Commodities Base Price Current Price
1964 1968
Rice 36 54
Pulse 30 50
Fish 130 155
Potato 40 35
Oil 110 110
The index number by unweighted methods is:
(a) 116.8 (b) 117.25 (c) 115.35 (d) 119.37

Solution (a)

Simple Average of Price Relatives

 P1 
  P 100 
Index =  0 
N
Additional Question Bank – Question 25
From the following table by the method of relative using Arithmetic mean the price Index
number is:
Commodity Wheat Milk Fish Sugar
Base Price 5 8 25 6
Current Price 7 10 32 12

(a) 140.35 (b) 148.25 (c) 140.75 (d) None

Solution (b)

Geometric Mean of Price Relatives

Index = Geometric Mean of Individual Years’ Price Relatives
Additional Question Bank – Question 71
The price of a number of commodities are given below in the current year 1975 and base year
1970.
Commodity A B C D E F
Base Price 45 60 20 50 85 120
Current Price 55 70 30 75 90 130
For 1975 with base 1970 by the Method of price relatives using Geometrical mean, the price
index is:

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 (a) 125.3 (b) 124.3 (c) 128.8 (d) None

Solution (b)

Additional Question Bank – Question 98

From the following data:
Commodities Base Year Current Year
A 25 55
B 30 45
The index numbers from G.M. Method is:
(a) 181.66 (b) 185.25 (c) 181.75 (d) None

Solution (a)

Weighted Average Method

In this method, we assign a weight to the prices of the commodities. Thereafter, the average is
calculated as follows:
𝑆𝑢𝑚 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑠
𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝐼𝑛𝑑𝑒𝑥 =
𝑆𝑢𝑚 𝑜𝑓 𝑊𝑒𝑖𝑔ℎ𝑡𝑠
Additional Question Bank – Question 40
From the following data for the 5 groups combined
Group Weight Index Number
Food 35 425
Cloth 15 235
Power & Fuel 20 215
Rent & Rates 8 115
Miscellaneous 22 150
The general index number is:
(a) 270 (b) 269.2 (c) 268.5 (d) 272.5

Solution (b)

Additional Question Bank – Question 50

From the data given below:
Commodity Price Relative Weight
A 125 5
B 67 2
C 250 3

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The suitable index number is:
(a) 150.9 (b) 155.8 (c) 145.8 (d) None

Solution (a)

Additional Question Bank – Question 72

From the following data
Group A B C D E F
Group Index 120 132 98 115 108 95
Weight 6 3 4 2 1 4
The general index I is given by:
(a) 111.3 (b) 113.45 (c) 117.25 (d) 114.75

Solution (a)

Additional Question Bank – Question 75

From the following data:
Group Weight Index Number
Base: 1952-53 = 100
Food 50 241
Clothing 2 21
Fuel & Light 3 204
Rent 16 256
Miscellaneous 29 179
The cost of living index numbers is:
(a) 224.5 (b) 223.91 (c) 225.32 (d) None

Solution (d)

Types of Weighted Indices

The weights are usually the quantities of the commodities. These indices can be classified into
two broad groups:
1. Weighted Aggregative Index
2. Weighted Average of Relatives

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Weighted Aggregative Index
In this method, weights are assigned to the prices of the commodities. The weights are usually
either the quantities or the value of goods, sold either during the base year, or the given year,
or an average of some years. Various alternative formulae used are as follows:
1. Laspeyres’ Index: In this Index, base year quantities are used as weights:

Laspeyres Index =
 PnQ0 100
 P0Q0
2. Paasche’s Index: In this Index current year quantities are used as weights:

Passche's Index =
 PnQn 100
 P0Qn
3. Methods based on some typical Period:

Index =
 PnQt 100 , where t stands for some typical period of years, the quantities of
 P0Qt
which are used as weights.
The Marshall-Edgeworth index uses this method by taking the average of the base year
and the current year.

Marshall-Edgeworth Index =
 Pn ( Q0 + Qn ) 100
 P0 ( Q0 + Qn )
4. Bowley’s Price Index: This index is the arithmetic mean of Laspeyres’ and Paasche’s.
Laspeyres' + Paasche's
Bowley’s Index =
2
5. Fisher’s ideal Price Index: This index is the geometric mean of Laspeyres’ and
Paasche’s.

Fisher's Index =
PQ  PQ
n 0 n n
100
PQ PQ
0 0 0 n

Laspeyre’s Index
Laspeyres Index =
PQ n 0
100
PQ 0 0

Additional Question Bank – Question 93

If PQ0 0 = 1360 , PQ

n 0 = 1900 , PQ 0 n = 1344 , PQ
n n = 1880 , then Laspeyre’s Index
Number is:
(a) 0.71 (b) 1.39 (c) 1.75 (d) None

Solution (b)

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Additional Question Bank – Question 24

If PQ
0 0 = 3500 , PQ n 0 = 3850 , then the Cost-of-Living Index (CLI) for 1950 w.r. to base
1960 is:
(a) 110 (b) 90 (c) 100 (d) None
Solution (a)

Paasche’s Index Number

Passche's Index =
 P Q 100
n n

PQ 0 n

Additional Question Bank – Question 80

From the following data
Commodities A B C D
1992 Price 3 5 4 1
Base Year Quantity 18 6 20 14
1993 Price 4 5 6 3
Current Year Quantity 15 9 26 15
The Paasche’s Price Index Number is:
(a) 146.41 (b) 148.25 (c) 144.25 (d) None

Solution (a)

Additional Question Bank – Question 99

Using the following data:
Commodity Base Year Current Year
Price Quantity Price Quantity
X 4 10 6 15
Y 6 15 4 20
Z 8 5 10 4
The Paasche’s formula for index is:
(a) 125.38 (b) 147.25 (c) 129.8 (d) 99.06

Solution (d)

Additional Question Bank – Question 14

If the ratio between Laspeyre’s Index Number and Paasche’s Index Number is 28 : 27, then the
missing figure in the following table P is:

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 Commodity Base Year Current Year
Price Quantity Price Quantity
X L 10 2 5
Y L 5 P 2

(a) 7 (b) 4 (c) 3 (d) 9

Solution (b)

Marshall Edgeworth Index

Marshall-Edgeworth Index =
 P ( Q + Q ) 100
n 0 n

 P (Q + Q )
0 0 n

Additional Question Bank – Question 81

From the following data:
Commodity Base Year Current Year
Price Quantity Price Quantity
A 7 17 13 25
B 6 23 7 25
C 11 14 13 15
D 4 10 8 8
The Marshall-Edgeworth Index Number is:
(a) 148.25 (b) 144.19 (c) 147.25 (d) 143.78

Solution (b)

Bowley’s Price Index

Laspeyres' + Paasche's
Bowley’s Index =
2
Additional Question Bank – Question 51
Bowley’s Index Number is expressed in the form of:
𝐿𝑎𝑠𝑝𝑒𝑦𝑟𝑒 ′ 𝑠 𝐼𝑛𝑑𝑒𝑥 + 𝑃𝑎𝑎𝑠𝑐ℎ𝑒 ′ 𝑠 𝐼𝑛𝑑𝑒𝑥
(a) 2
𝐿𝑎𝑠𝑝𝑒𝑦𝑟𝑒 ′ 𝑠 𝐼𝑛𝑑𝑒𝑥 × 𝑃𝑎𝑎𝑠𝑐ℎ𝑒 ′ 𝑠 𝐼𝑛𝑑𝑒𝑥
(b) 2
𝐿𝑎𝑠𝑝𝑒𝑦𝑟𝑒 ′ 𝑠 𝐼𝑛𝑑𝑒𝑥 − 𝑃𝑎𝑎𝑠𝑐ℎ𝑒 ′ 𝑠 𝐼𝑛𝑑𝑒𝑥
(c) 2
(d) None

Solution (a)

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Additional Question Bank – Question 68
The Bowley’s Price index number is represented in terms of:
(a) A.M. of Laspeyre’s and Paasche’s Price index number
(b) G.M. of Laspeyre’s and Paasche’s Price index number
(c) A.M. of Laspeyre’s and Walsh’s price index number
(d) None

Solution (a)

Fisher’s Ideal Price Index

Fisher's Index =
 P Q   P Q 100
n 0 n n

PQ PQ 0 0 0 n

Additional Question Bank – Question 36

From the following data base year:-
Commodity Base Year Current Year
Price Quantity Price Quantity
A 4 3 6 2
B 5 4 6 4
C 7 2 9 2
D 2 3 1 5
Fisher’s Ideal Index is:
(a) 117.3 (b) 115.43 (c) 118.35 (d) 116.48

Solution (a)

Additional Question Bank – Question 22

If PQ n n = 249 , PQ0 0 = 150 , Paasche’s Index Number = 150 and Drobiseh and Bowely’s
Index number = 145, then the Fisher’s Ideal Index Number is:
(a) 75 (b) 60 (c) 145.97 (d) 144.91

Solution (d)

Additional Question Bank – Question 34

Bowley's index number is 150. Fisher's index number is 149.95. Paasche's index number is:
(a) 146.13 (b) 154 (c) 148 (d) 156
Solution (a)

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Weighted Average of Relatives
In this method, weighted arithmetic mean is used to calculate the index.

 Pn 
  P  ( P Q )
0 0

Index =  0  100
 P0Q0
Additional Question Bank – Question 58
Given below are the data on prices of some consumer goods and the weights attached to the
various items. Compute price index number for the year 1985 (Base 1984 = 100)
Items Unit 1984 1985 Weight
Wheat Kg. 0.50 0.75 2
Milk Litre 0.60 0.75 5
Egg Dozen 2.00 2.40 4
Sugar Kg. 1.80 2.10 8
Shoes Pair 8.00 10.00 1
Then weighted average of Price Relative Index is:
(a) 125.43 (b) 123.3 (c) 124.53 (d) 124.52

Solution (b)

The Chain Index Numbers

Till now, we have been taking a fixed base; however, when conditions change rapidly, the fixed
base does not suit the required needs. In such a case, changing base is more suitable. For
example, the base for the year 1999 could be 1998; the base for the year 2000 could be 1999
(not 1998), the base for the year 2001 could be 2000 (neither 1998, nor 1999), and so on. If it
is desired to associate these relatives to a common base, the results are chained. Thus, under
this method the relatives of each year are first related to the preceding year, called the link
relatives, and then they are chained together by successive multiplication to form a chain index.
Chain Index = (Link Relative of the Current Year × Chain Index of the Previous Year) ÷ 100
For example,
Year Price Link Relatives Chain Indices
(Taking Previous Year as Base Year) (Taking 1991 as Base Year)
1991 50 100.00 100.00
60 120
1992 60 100 = 120.00 100 = 120.00
50 100
62 103.33
1993 62 100 = 103.33 120 = 124.00
60 100
65 104.84
1994 65 100 = 104.84 124 = 129.90
62 100

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Additional Question Bank – Question 87
From the following data:
Year 1992 1993 1995 1996 1997
Link Index 100 103 105 112 108
(Base 1992 = 100) for the years 1993–97. The construction of chain index is:
(a) 103, 100.94, 107, 118.72 (b) 103, 108.15, 121.3, 130.82
(c) 107, 100.25, 104, 118.72 (d) None

Solution (b)

Quantity Index Numbers

1. Simple Aggregate of Quantities

Index =
 Qn 100
 Q0
2. Simple Average of Quantity Relatives:
 Qn
Index =
 Q0 100
n
3. Weighted Aggregate Quantity Indices:
a. With base year weight (Laspeyre’s index)

Index =
 Qn P0 100
 Q0 P0
b. With current year weight (Paasche’s index)

Index =
 Qn Pn 100
 Q0 Pn
c. Fisher’s Ideal (Geometric mean of the above)

Index =
Q P  Q P
n 0 n n
100
Q P Q P
0 0 0 n

4. Base-year weighted average of quantity relatives

Q 
  Qn  ( P0Q0 )
Index =  0  100
 P0Q0
Additional Question Bank – Question 97
From the following data:
Commodities Q0 P0 Q1 P1
A 2 2 6 18
B 5 5 2 2
C 7 7 4 24
Then the fisher’s quantity index number is:

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 (a) 87.34 (b) 85.24 (c) 87.25 (d) 78.93

Solution (d)

Value Indices
Value = Price × Quantity

Value Index =
V =  P Q
n n n

V  P Q
0 0 0

Additional Question Bank – Question 62

From the following data:
Commodity Base Year Current Year
Price Quantity Price Quantity
A 4 3 6 2
B 5 4 6 4
C 7 2 9 2
D 2 3 1 5
Then the value ratio is:
59 49 41 47
(a) (b) (c) (d)
52 47 53 53

Solution (a)

Additional Question Bank – Question 95

The total value of retained imports into India in 1960 was ₹71.5 million per month. The
corresponding total for 1967 was ₹87.6 million per month. The index of volume of retained
imports in 1967 composed with 1960 (= 100) was 62.0. The price index for retained inputs for
1967 our 1960 as base is:
(a) 198.61 (b) 197.61 (c) 198.25 (d) None

Solution (b)

Limitations and Usefulness of Index Numbers

Limitations
1. As the indices are constructed mostly from deliberate samples, chances of errors
creeping in cannot be always avoided.
2. Since index numbers are based on some selected items, they simply depict the broad
trend and not the real picture.

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 3. Since many methods are employed for constructing index numbers, the result gives
different values and this at times creates confusion.

Usefulness
1. Framing suitable policies in economics and business: They provide guidelines to make
decisions in measuring intelligence quotients, research etc.
2. They reveal trends and tendencies in making important conclusions in cyclical forces,
irregular forces, etc.
3. They are important in forecasting future economic activity. They are used in time series
analysis to study long-term trend, seasonal variations and cyclical developments.
4. Index numbers are very useful in deflating i.e., they are used to adjust the original data
for price changes and thus transform nominal wages into real wages.
5. Cost of living index numbers measure changes in the cost of living over a given period.

Deflating Time Series Using Index Numbers

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒
𝐷𝑒𝑓𝑙𝑎𝑡𝑒𝑑 𝑉𝑎𝑙𝑢𝑒 =
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑡ℎ𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟
or
𝐵𝑎𝑠𝑒 𝑃𝑟𝑖𝑐𝑒 (𝑃0 )
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑃𝑟𝑖𝑐𝑒 (𝑃𝑛 )

𝐴𝑐𝑡𝑢𝑎𝑙 𝑊𝑎𝑔𝑒𝑠
𝑅𝑒𝑎𝑙 𝑊𝑎𝑔𝑒𝑠 = × 100
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐿𝑖𝑣𝑖𝑛𝑔 𝐼𝑛𝑑𝑒𝑥

Year Wholesale Price Gross National Product at Real Gross National

Index Current Prices Product
7499
1970 113.1 7499 100 = 6630
113.1
7935
1971 116.3 7935 100 = 6823
116.3
8657
1972 121.2 8657 100 = 7143
121.2
9323
1973 127.7 9323 100 = 7301
127.7

Additional Question Bank – Question 30

In 1980, the net monthly income of the employee was ₹800/- p.m. The consumer price index
number was 160 in 1980. It rises to 200 in 1984. If he has to be rightly compensated, the
additional D.A. to be paid to the employee is:
(a) ₹175/- (b) ₹185/- (c) ₹200/- (d) ₹125/-

CA NISHANT KUMAR 16
Solution (c)

Additional Question Bank – Question 35

With the base year 1960 the C.L.I. in 1972 stood at 250. x was getting a monthly salary of ₹500
in 1960 and ₹750 in 1972. In 1972, to maintain his standard of living in 1960, x has to receive
as extra allowances of:
(a) ₹600/- (b) ₹500/- (c) ₹300/- (d) None

Solution (b)

Additional Question Bank – Question 76

Consumer price index number goes up from 110 to 200 and the Salary of a worker is also raised
from ₹325 to ₹500. Therefore, in real terms, to maintain his previous standard of living he
should get an additional amount of:
(a) ₹85 (b) ₹90.91 (c) ₹98.25 (d) None

Solution (b)

Additional Question Bank – Question 89

Net monthly salary of an employee was ₹3000 in 1980. The consumer price index number in
1985 is 250 with 1980 as base year. If the has to be rightly compensated, then, the dearness
allowance to be paid to the employee is:
(a) ₹4,800.00 (b) ₹4,700.00 (c) ₹4,500.00 (d) None

Solution (c)

Additional Question Bank – Question 90

Net Monthly income of an employee was ₹800 in 1980. The consumer price Index number was
160 in 1980. It is rises to 200 in 1984. If he has to be rightly compensated. The additional
dearness allowance to be paid to the employee is:
(a) ₹240 (b) ₹275 (c) ₹250 (d) None

Solution (d)

CA NISHANT KUMAR 17
Additional Question Bank – Question 23
Consumer Price index number for the year 1957 was 313 with 1940 as the base year. The
Average Monthly wages in 1957 of the workers into factory be ₹160/-. Their real wages is:
(a) ₹48.40 (b) ₹51.12 (c) ₹40.30 (d) None

Solution (b)

Additional Question Bank – Question 96

During the certain period the C.L.I. goes up from 110 to 200 and the Salary of a worker is also
raised from 330 to 500, then the real terms is:
(a) loss by ₹50 (b) loss by ₹75 (c) loss by ₹90 (d) None

Solution (a)

Additional Question Bank – Question 88

During a certain period the cost of living index number goes up from 110 to 200 and the salary
of a worker is also raised from ₹330 to ₹500. The worker does not get really gain. Then the real
wages decreased by:
(a) ₹45.45 (b) ₹43.25 (c) ₹100 (d) None

Solution (c)

Shifting and Splicing of Index Numbers

Shifting of Index Numbers
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥
𝑆ℎ𝑖𝑓𝑡𝑒𝑑 𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 = × 100
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑜𝑓 𝑡ℎ𝑒 𝑌𝑒𝑎𝑟 𝑜𝑛 𝑤ℎ𝑖𝑐ℎ 𝑖𝑡 ℎ𝑎𝑠 𝑡𝑜 𝑏𝑒 𝑠ℎ𝑖𝑓𝑡𝑒𝑑

Year Original Price Index Shifted Price Index to Base 1990

125
1988 125 100 = 89.3
140
131
1989 131 100 = 93.6
140
140
1990 140 100 = 100.0
140
147
1991 147 100 = 105.0
140

CA NISHANT KUMAR 18
Splicing of Index Numbers
Splicing means combining two index covering different bases into a single series. Splicing two
sets of price index numbers covering different periods of time is usually required when there is
a major change in quantity weights. It may also be necessary on account of a new method of
calculation or the inclusion of new commodity in the index.
Year Old Price Index Revised Price Index Spliced Price Index
[1900 = 100] [1995 = 100] [1995 = 100]
100
1990 100.0 100 = 87.6
114.2
102.3
1991 102.3 100 = 89.6
114.2
105.3
1992 105.3 100 = 92.2
114.2
107.6
1993 107.6 100 = 94.2
114.2
111.9
1994 111.9 100 = 98.0
114.2
1995 114.2 100.0 100.0
1996 102.5 102.5
1997 106.4 106.4
1998 108.3 108.3
1999 111.7 111.7
2000 117.8 117.8

Test of Adequacy
There are four tests:
1. Unit Test –
a. This test requires that the formula should be independent of the unit in which
(or, for which) prices and quantities are quoted.
b. All the formulae satisfy this test, except for the simple (unweighted) aggregative
index.
2. Time Reversal Test –
a. It is a test to determine whether a given method will work both ways in time,
forward and backward.
b. The test provides that the formula for calculating the index number should be
such that two ratios, the current on the base and the base on the current should
multiply into unity.
c. In other words, the two indices should be reciprocals of each other.
P P
Symbolically, P01  P10 = 1 , where, P01 = 1 , and P10 = 0 .
P0 P1
d. Check of Different Methods
i. Laspeyres’ method

CA NISHANT KUMAR 19
 P01 =
 PQ , P =  P Q
1 0 0 0

PQ  PQ
10
0 0 1 0

P01 P =
 PQ   P Q  1 1 0 0 0

 P Q  PQ
10
0 0 1 0

Therefore, Laspeyres’ Method does not satisfy this test.

ii. Paasche’s method

P01 =
 PQ
1 n
, P10 =
 P0Qn
 P0Qn  PQ
1 n

P01  P10 =
 PQ   P Q1 n 0 n
1
 P Q  PQ 0 n 1 n

Therefore, Paasche’s Method does not satisfy this test.

iii. Fisher’s Ideal

P01 =
 PQ   PQ , P 1 0 1 1
=
PQ  PQ
0 1 0 0

PQ PQ  PQ  PQ
10
0 0 0 1 1 1 1 0

P01 P =
 PQ   PQ 1 0 1 1

PQ  PQ =1
0 1 0 0

PQ PQ  PQ  PQ
10
0 0 0 1 1 1 1 0

Therefore, Fisher’s Idea does satisfy this test.

3. Factor Reversal Test –
a. This states that the product of price index and the quantity index should be equal

to the corresponding value index, i.e.,

 PQ1 1
.
 P0Q0
b. Symbolically, P01  Q01 = V01 .
c. Check for Fisher’s Method

P01 =
 PQ   PQ , Q =  Q P   Q P
1 0 1 1 1 0 1 1

PQ PQ Q P Q P
01
0 0 0 1 0 0 0 1

P01 Q =
 PQ   PQ   Q P   Q P
1 0 1 1 1 0 1 1

 P Q  P Q Q P Q P
01
0 0 0 1 0 0 0 1

P01 Q =
 PQ   PQ   Q P   Q P
1 0 1 1 1 0 1 1

 P Q  P Q Q P Q P
01
0 0 0 1 0 0 0 1

(  PQ )
2

Q =
1 1
P01
( P Q )
01 2
0 0

P01 Q =
 PQ 1 1

PQ
01
0 0

Therefore, Fisher’s Method satisfies this test as well.

d. While selecting an appropriate index formula, the Time Reversal Test and the
Factor Reversal test are considered necessary in testing the consistency.

CA NISHANT KUMAR 20
 e. Since Fisher’s Index number satisfies both the tests (Time Reversal, as well as
Factor Reversal), it is called an Ideal Index Number.
4. Circular Test –
a. As per this test, P01  P12  P20 = 1 .
b. Therefore, this property enables us to adjust the index values from period to
period without referring to the original base every time.
c. The test of this shiftability of base is called the circular test.
d. This test is not met by Laspeyres, or Paasche’s or the Fisher’s ideal index.
e. The simple geometric mean of price relatives and the weighted aggregative with
fixed weights meet this test.
Additional Question Bank – Question 60
If the 1970 index with base 1965 is 200, and 1965 index with base 1960 is 150, the index 1970
on base 1960 will be :
(a) 700 (b) 300 (c) 500 (d) 600

Solution (b)

Miscellaneous Questions
Additional Question Bank – Question 91
When the cost of Tobacco was increased by 50%, a certain hardened smoker, who maintained
his formal scale of consumption, said that the rise had increased his cost of living by 5%. Before
the change in price, the percentage of his cost of living was due to buying Tobacco is:
(a) 15% (b) 8% (c) 10% (d) None

Solution (c)

Additional Question Bank – Question 94

The consumer price Index for April 1985 was 125. The food price index was 120 and other
items index was 135. The percentage of the total weight given to food index is:
(a) 66.67 (b) 68.28 (c) 90.25 (d) None

Solution (a)

Additional Question Bank – Question 41

From the following data with 1966 as base year:
Commodity Quantity Units Values (₹)
A 100 500
B 80 320

CA NISHANT KUMAR 21
 C 60 150
D 30 360
The price per unit of commodity A in 1966 is:
(a) ₹5 (b) ₹6 (c) ₹4 (d) ₹12

Solution (a)

Additional Question Bank – Question 73

The price of a commodity increases from ₹5 per unit in 1990 to ₹7.50 per unit in 1995 and the
quantity consumed decreases from 120 units in 1990 to 90 units in 1995. The price and quantity
in 1995 are 150% and 75% respectively of the corresponding price and quantity in 1990.
Therefore, the product of the price ratio and quantity ratio is:
(a) 1.8 (b) 1.125 (c) 1.75 (d) None

Solution (b)

Additional Question Bank – Question 92

If the price index for the year, say 1960 be 110.3 and the price index for the year, say 1950 be
98.4, then the purchasing power of money (Rupees) of 1950 in 1960 is:
(a) ₹1.12 (b) ₹1.25 (c) ₹1.37 (d) None

Solution (a)

Additional Question Bank – Question 65

In 1996 the average price of a commodity was 20% more than in 1995 but 20% less than in
1994; and more over it was 50% more than in 1997 to price relatives using 1995 as base (1995
price relative 100) Reduce the data is:
(a) 150, 100, 120, 80 for (1994–97)
(b) 135, 100, 125, 87 for (1994–97)
(c) 140, 100, 120, 80 for (1994–97)
(d) None

Solution (a)

CA NISHANT KUMAR 22
Additional Question Bank – Question 84
In 1976 the average price of a commodity was 20% more than that in 1975 but 20% less than
that in 1974 and more over it was 50% more than that in 1977. The price relatives using 1975
as base year (1975 price relative = 100) then the reduce data is:
(a) 8, .75 (b) 150, 80 (c) 75, 125 (d) None

Solution (b)

CA NISHANT KUMAR 23