CHAPTER-2
INDEX NUMBERS
SECTION – A
ONE MARK QUESTIONS:
1. In index number what is meant by base year?
Ans. The year selected for the comparison in called base year.
2. In index number what is meant by current year?
Ans. The year selected & compared with the base year is called current year.
3. Define price relative.
Ans. Price relative is the price of the current year is expressed as percentage of the price in the base year. i.e.,
P01= P1/P0 x100
4. Write the formula of price relative.
Ans. P01= P1/P0 x100
5. Define quantity relative.
Ans. Quantity relative is the quantity of the current year is expressed as percentage of the quantity in the base
year. i.e.,
Q01= Q1/Q0 x100
6. Write the formula of quantity relative.
Ans. Q01= Q1/Q0 x100
7. What is the value of index number for the base year?
Ans. The value of index number for the base year is 100.
[Link] value relative.
[Link] relative is the value of the current year is expressed as percentage of the value in the base year. i.e.,
V01=V1/V0 x100.
9. If the price during the current year is triple the price during the base year, what is the value of price
relative?
Ans. 300.
10. If the price relative is 175, what would you conclude?
Ans. 75% of the price is increased in the current year when compared with the base year.
11. If the general price level goes up by 80% between 2000 & 2012, what is the index number for 2012 with
base 2000?
Ans. 180 % is the index number for 2012 with base 2000.
12. If the quantity index number for current year is 80, then what would you conclude?
Ans. 20% of the quantity is decreased in the current year when compared with the base year.
13. Mention a characteristic of index numbers.
Ans. Index numbers are specialized type of averages.
14. Mention use of index numbers.
Ans. Index numbers are used in studying trends & tendencies.
15. Mention a limitation of index numbers.
Ans. The quality of the commodities is not considered in the construction of index numbers.
16. Define price index number.
Ans. Price index number is the measure of the general changes is the prices of the commodities in the current
year as compared with that of base year.
[Link] quantity index number.
[Link] is relative change in the volume of the goods produced or consumed or distributed.
[Link] value index number.
[Link] is the relative change in the total money value of the production.
[Link] is wholesale price index number?
[Link] is the relative change in the wholesale prices.
20. What is retail price index number?
Ans. It is the relative change in the retail prices.
[Link] is fixed base period?
[Link] the period of comparison is kept fixed for all current years, it is called fixed base period.
[Link] is chain base period?
[Link] the relative changes in the level of phenomenon for any period are compared with that of immediate
preceding period, is called chain base period.
23. Mention two steps involved is the construction of index numbers.
Ans. i. Defining the purpose of the index numbers. ii. Selection of the base period.
24. Name the common average used in the construction of index numbers.
Ans. AM
25. Which average is considered as the best average in the construction of index number?
Ans. GM.
26. Why GM is considered as the best average in the construction of index number?
Ans. GM is considered as the best average in the construction of index number because it is used for averaging
ratios.
27. What is simple aggregative price index number?
Ans. Simple aggregative price index number is the aggregative of the prices in current year expressed as the
percentage of the aggregative of the prices in base year.
[Link] weight is used in the construction of laspeyer's price index number?
Ans. Base year quantity is used as weight in the construction of laspeyer's price index number.
29. Which weight is used in the construction of paasche's price index number?
Ans. Current year quantity.
30. Which system of weight is used in the construction of Marshall Edgeworths price index number?
Ans. Average of base year & current year quantities.
31. State the relation between Laspeyre's, Paasche's & Dorbish - Bowley's index numbers.
Ans. Dorbish - bowley's IN is the AM of Laspeyres & Paasche's index number.
32. State the relation between Laspeyer's, Paasche's & Fisher's index number.
Ans. Fisher's index number is the GM of Laspeyer's & Paasche's index number
[Link] weights are used in the construction of Kelly’s price index no.
Ans. Fixed quantity weights are used in the construction of kelly’s price index no.
34. Which weight is used in the construction of Laspeyre’s quantity index number.
Ans. Base year price.
35. Which weight is used in the construction of Paasche's quantity index number?
Ans. Current year price.
36. Which system of weight is used in the construction of Marshall edgeworth quantity index number.
Ans. Average of base year & current year prices.
[Link] is meant by quantity weights?
Ans. It means the amount of commodity produced or consumed during a period.
[Link] is meant by value weights?
[Link] means quantity produced & multiplied by the price of the quantity.
39. What do you mean by unit test?
Ans. Unit test is the test requires that the index numbers should be independent of the units in which price or
quantity are quote of various commodities.
40. Name the index number which does not satisfy unit test.
Ans. Simple aggregative price index number.
41. State the condition required to satisfy TRT.
[Link] =P01XP10=1
42. Name the index number which satisfies TRT.
Ans. Marshall - edgeworth's, Fisher's & Kelly's index numbers.
43. Does Marshall - Edgeworths index number satisfies TRT?
Ans. Yes.
44. State the condition required to satisfy FRT.
[Link]= P01XQ01=V01
45. Name the index number which satisfies FRT.
Ans. Fisher's index number.
46. Does Marshall - Edgeworth's index number satisfies FRT?
Ans. No.
47. Name the index number which satisfies both TRT & FRT.
Ans. Fishers index number
48. State the condition required to satisfy circular test.
Ans. P01xP12xP20=1
49. Name the index number which satisfies circular test.
Ans. Simple GM price index number & Kelly's index number.
50. Which index number shows upward bias?
Ans. Laspeyre's index number.
51. Why Laspeyre's price index number shows upward bias?
Ans. Base year quantities are given more weightage than needed so
52. Which index number shows downward bias?
Ans. Paasche's index number.
53. Why Paasche's price index number shows downward bias?
Ans. Because the current year quantities are under estimated & greater variation needed.
54. Is Marshall – Edgeworth is index number free from bias?
Ans. Yes.
55. Why Fisher's index number is free from bias?
Ans. Fisher's index number is free from bias because it considers both base year & current year quantities
56. Define consumer price index number (Cost of living index number).
Ans. Consumer price index number is an index number of the cost met by a specified class of consumers in
buying a ‘Basket of goods & services’
57. Write a use of consumers price index number.
Ans. It is used by the government for the formulation of price policy, wage policy & general economic policies.
58. Which price of the commodities is used in the construction of cost of living index number?
Ans. Retail price.
59. State a method used to compute consumer price index number.
Ans. Aggregative expenditure method.
SECTION – B
TWO MARK QUESTIONS:
1. Define an index number.
Ans. Index number is the statistical device designed to measure the relative changes in the level of
phenomenon i.e., income, profession, etc.
2. Why index numbers are known as 'economic barometers'?
Ans. Just as a barometer measure the atmospheric pressure, index numbers are helpful in measuring the
pressure of economic & business behaviour of the economy of a country. That is whyindex numbers are called
as economic barometers.
3. In index number what is meant by base year & current year?
Ans. Base year selected for comparing & current year is compared with the base year.
4. State two uses of index numbers.
Ans. i. Index numbers are specialized type of averages.
ii. Index numbers are expressed in ratio but for comparison, it is expressed as percentage.
5. State two limitations of index numbers.
Ans. i. The quality of commodities are not considered in the construction of index numbers.
ii. Many formula are used is the construction of index numbers & different formula.
6. Mention four steps involved in the construction of general price index number.
Ans. i. Defining the purpose of the index number.
ii. Selection of base period
iii. Selection of commodities or items.
iv. Obtaining the price quotations.
7. Which average is considered as the best average in the construction of index number? Why?
Ans. GM is the best average is the construction of index number because it is averaging ratios.
8. State two norms (considerations) for the selection of base year.
Ans. i. Base year should be economically stable.
ii. Base year should not be too distant from the current year.
9. Explain TRT.
Ans. Price computed forward multiplied by the price computed backward is always equal to one is called Time
Reversal Test. i.e., P01 x P01 = 1.
10. Explain FRT.
Ans. The changes in the price multiplied by the changes in the quantity is equal to the total money value is
called factor reversal test, i.e., P01 x Q01 = V01
11. Why Fisher's index number is called as an 'Ideal index numbers'?
Ans. i. It is based on GM which is the best average for averaging ratios.
ii. It considers both base ¤t year quantities.
iii. It satisfies both TRT & FRT.
iv. It is free from bias.
12. Write down the steps involved in the Construction of consume price index number.
Ans. i. Defining purpose & scope.
ii. Conducting family budget enquiry & selecting the weights
iii. Obtaining price quotations.
iv. Computing the index numbers.
13. Write down two uses of consumer price index number.
Ans. [Link] is used widely in wage negotiations & wage contracts.
ii. There are used by the government for the formulation of price policy, wage policy & general economic
policies.
[Link] are used for deflation money or income.
[Link] is commonly used in fixation of salary or grant of bonus to the employees.
[Link] are used in for comparing changes in the cost of living of different classes of people.
SECTION-C
FIVE MARKS QUESTIONS:
1. Write uses of index numbers.
[Link] of index numbers:
i. It is used in studying trends & tendencies
ii. It is used in measuring the change in cost of living of different groups of people.
iii. It is used in measuring purchasing power of money & also used for deflation.
2. Write limitations of index numbers.
Ans. Limitations of index numbers:
i. While constructing index numbers, the quality of product is not taken into consideration.
ii. As customs, traditions & habits of people vary from time to time, it is difficult to assign proper weights to the
various
iii. Many formulae are used in the construction of index numbers & number from the following data.
[Link] are the steps involved in the construction of index numbers? Explain any two.
Ans. The steps involved in the construction of index numbers are:
i. Defining the purpose of the index numbers.
ii. Selection of base period.
iii. Selection of commodities or items.
iv. Obtaining price quotations
v. Choice of an average
vi. Selection of weights
vii. Selection of suitable formula.
viii. Selection of commodities or items: It basically depends on the purpose represents the real habits,
tastes & uses customs of the people for whom the index is meant.
ix. Obtaining price quotations : to obtain price quotations for each commodity, there prices may vary from
from shop to shop in the same market, then these prices are averaged & used in the construction of index
numbers.
4. Explain briefly the steps involved in the construction of cost of living index number.
Ans. The steps involved in the construction of cost of living index number are:
i. Defining purpose & scope: It is very essential to decide clearly the class of people for whom the index
number is to be constructed along with the geographical area
ii. Conducting family budget inquiry & selecting the weights: various items are collected. Items are
classified according to food, clothing, fuel, lighting, house rent & miscellaneous.
iii. Obtaining price quotations: Here, retail prices of different commodities are collected which is a very
difficult task because they vary from one place to another place & even at one place from shop to shop & even
at one shop from one consumer to another consumer. Then the price quotations are o
iv. Computing the index number: There are 2 methods of computing CPI
a. Aggregative expenditure method.
b. Family budget method.
[Link] uses of consumer price index number.
[Link] of consumer price index number:
i. CPI is used widely in wage negotiations & wage contracts.
ii. There are used by the government for the formulation of price policy, wage policy & general economic
policies.
IMPORTANT POINTS FROM THE CHAPTER
Laspeyre’s index number shows upward bias because it is based on base year quantities which gives
relatively more weightage for such commodities than needed and consequently the numerator is
relatively larger.
Paasche’s index number, which uses the current year quantities as weights, is generally an under
estimate because the greater variations of price will be paid lesser importance than needed& so it
shows downward bias
Price index is 150 means price level in the current year is 150% of the price in the base year.
Average price level in 2010 is triple the average price level in 1990 means the index number of price for
2010 with base 1990 is 300.
Index number for 2012 with base 2000 is 225 means average price level has increased by 125% from
2000 to 2012.
In simple or unweighted index numbers each item is supposed to have equal importance, but in
weighted index number, the weights are assigned to various items in accordance with their relative
importance.