Karnataka 1st PUC Economics Question Bank Chapter 8 Index Numbers

1st PUC Economics Index Numbers TextBook Questions and Answers

I. Choose the correct answers (each question carries 1 mark)

Question 1.
The index number is a
(a) Measure of relative changes
(b) A special type of an average
(c) A percentage relative
(d) All the above
(a) Measure of relative changes

Question 2.
The formula P01 = $$\frac{\Sigma P_{1} Q_{0}}{\sum P_{0} Q_{0}}$$ × 100 was given by
(a) Laspeyres
(b) Paasche
(c) Marshal
(d) Fisher
(a) Laspcrcs

Question 3.
State the basic difficulty in constructing index numbers
(a) Selection of commodities
(b) Selecting of base year
(c) Selection of prices
(d) All of these
(b) Selecting of the base car

Question 4.
In the index number of which year price is assumed to be 100?
(a) Current year
(b) Base year
(c) Selection of prices
(d) %one of these
(b) Base year

Question 5.
Index numbers are related to
(a) General problems
(b) No problem
(c) Particular problem
(d) one of these
(a) General problems

Question 6.
Laspeyres index is based on
(a) Base year quantity
(b) Current year quantity
(c) Both of them
(d) Average of current and base
(a) Base year quantity

Question 7.
Paasche index is based on
(a) Current year quantity
(b) Base year quantity
(c) Both of them
(d) None of these
(a) Current year quantity

Question 8.
Purchasing power of money is equal to
(a) Price index
(b) $$\frac{1}{\text { cost of living index }}$$
(C) Quantity index
(d) Wages
(a) Price index

Question 9.
The consumer price index is also known as
(a) Price of living index
(c) Consumer price index
(b) Cost of living index
(d) All of these
(b) Cost of living index

II. Fill in the blanks (each question carries 1 mark)

Question 1.
Index numbers help in the framing of ……………………….
Economic policy

Question 2.
Index numbers are expressed in …………………….
Percentages

Question 3.
Inflation affects the ……………….. of common people.
Cost of living

Question 4.
The rise in Sensex reflects the ………..of the economy.
Good health

Question 5.
CPI measures the average change in ……………
Retail prices

Question 6.
A weighted aggregative price index uses ……………… quantities as weights.
Base period

Question 7.
Using current year quantities as weights are known as……………..
Paasche Price Index

Question 8.
Index number becomes a……………. when the relative importance of items are taken care of.
Weighted index

Question 9.
P1 and P0 indicate the price of the commodity in the current and ……… period respectively.
Base

III. Match the following (total 5 marks)

Question 1.

 A B 1. CPI (a) Producer price index 2. WPI (b) Agriculture price index 3. IPI (c) Consumer price index 4. API (d) Wholesale price index 5. PPI (e) Industrial production index

 A B 1. CPI (c) Consumer price index 2. WPI (d) Wholesale price index 3. IPI (c) Consumer price index 4. API (b) Agriculture price index 5. PPI (a) Producer price index

IV. Answer the following questions in a word/sentence (each question carries 1 mark).

Question 1.
What is an index number?
An index number is a statistical device for measuring changes in the magnitude of a group of related variables.

Question 2.
State any one feature of index number.

• Index number measures changes in the value of the variables,
• Index numbers are specialized averages.

Question 3.
Define base year.
The base year is the period with which the comparison is to be made while calculating index numbers.
In other words, it is the reference period from which an index number is calculated.

Question 4.
What is price relative?
Price relative refers to percentages of current prices with reference to base year prices.

Question 5.
Where can we get some important index numbers such as CPI, WPI, liP, etc?
We can get CPI, WPT. liP etc., from economic survey

Question 6.
Define the current year.
The current year is that period which ¡s the present financial year taken for the purpose of calculating index numbers.

Question 7.
What is inflation?
A general rise in the price of all goods and services is called inflation.

Question 8.
Give the formula to calculate the weekly inflation rate.
To calculate the weekly inflation rate, the following formula is used:
Rate of inflation = $$\frac{\text { Current year WPI – Previous year WPI }}{\text { Previous year WPI }}$$

Question 9.
Write the formula to calculate the index of Industrial Production.
To calculate index of industrial Production, the following formula is used:
Index of industnal production = $$\frac{\Sigma q_{1} \times \mathrm{W}}{\Sigma \mathrm{W}}$$

Question 10.
In which index number is there relative importance of the items?
The consumer price index has the relative importance of the items.

Question 11.
Which item is having the highest weight in CPI for an industrial worker?
Food and beverages have the highest weight in CPI for industrial workers.

Question 12.
What does Wholesale Prices Index indicate?
The wholesale prices index indicates the change in the general price level.

Question 13.
What does the Consumer Price Index number reflect?
The consumer price index number reflects the average change in retail prices.

Question 14.
Mention the types of price index numbers.
The types of Price index numbers are:

• Consumer price index number which includes, wholesale price index numbers and retail price index numbers.
• Quantity index numbers
• Value index numbers
• Industrial production index
• Agricultural production index
• Sensitive Index – (SENSEX)
• Producer price index.

Question 15.
What is the difference between unweighted and weighted index numbers?

 Unweighted Index Numbers Weighted Index Numbers Here each item is supposed to have the same weight as no weight is expressly assigned to any item. Here, while constructing weighted index numbers, rational weights are assigned to all items in an explicit manner.

Question 16.
What is SENSEX?
Sensex is the short form of the Bombay Stock Exchange Sensitive Index with 1978-79 as a base. It is the benchmark index for the Indian stock market.

Question 17.
Which index do the industrialists use in recent times instead of the Wholesale Price Index?
The industrial production index is being used by industrialists in recent times instead of the wholesale Price Index.

V. Answer the following questions in about four sentences (each question carries 2 marks)

Question 1.
Write any four features of index numbers.
The four features of index numbers are as follows:

• Index numbers are specialized averages
• Index numbers are expressed in percentages
• Index numbers measure the effect of changes in relation to time or place
• Index numbers measure the changes not capable of direct measurement.

Question 2.
What is the price index number? Mention its types.
Price index numbers measure the general changes in prices between the current year and the base year. The general price index is used to measure the value of money. The following are the different types of price index numbers:

• Consumer price index
• Wholesale price index
• Retail price index
• Producer price index.

Question 3.
Why the simple aggregative price index is of limited use?
The simple aggregative price index is of limited use because the units of measurement of prices of various commodities are not the same. It is unweighted because the relative importance of the items has not been properly reflected. The items are treated as having equal importance or weight. But, in reality, the items purchased differ in order of importance.

For instance, food occupies a large proportion of our expenditure. In that case, an equal rise in the price of an item with a large weight and that of an item with low weight will have different implications for the overall change in the price index.

Question 4.
Mention some important index numbers.
Following are a few important index numbers:

• Consumer price index
• SENSEX
• Industrial production index
• Wholesale price index
• Producer price index
• Agricultural production index.

Question 5.
What is the consumer price index number? How do you calculate it?
The consumer price index is the index that measures the average change in retail prices. The CPI for industrial workers is increasingly 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 consumer price index is calculated with the help of the following formula:
CPI = $$\frac{\Sigma W R}{\Sigma W}$$

Question 6.
What is the wholesale price index? Write its drawbacks.
The wholesale price index number indicates the change in the general price level. In other words, it reflects the general price level for a group of items taken as a whole. In India,-it is the most popular price index used in the business industry and policy market. It acts as an indicator of the rate of inflation.

The main drawbacks are:

• It does not have any reference consumer category.
• It does not include items from services like barber charges, repairing, etc.

Question 7.
What is the industrial production index? Which year is the base for their index in India?
The index number of industrial production measures changes in the level of industrial production comprising many industries. It includes the production of both public and the private sectors. It is a weighted average of quantity relatives.

The industrial production index measures the quantity of production in the area of manufacturing, mining, and utilities. They measure the overall change in the total volume of industrial production.

In India. the industrial production index is currently calculated every month with 2004-05 as the base.

Question 8.
What does the agricultural production index indicate? How much weight is given to food in their index?
The agricultural production index is a weighted average of quantity relatives. Its base period is triennium ending 2007-08. In 2013-14. the index number of agricultural production was 120.2.
It has increased by 22.2 percent from the year 2007-08.
Foodgrains have a weight of 50.07 percent in the agricultural production index.

Question 9.
What does SENSEX indicate? Is it a guide to investors?
Sensex is the short form of the Sensitive Index of the Bombay Stock Exchange. The value of the Sensex is with reference to the period 1978-79.

Yes. Sensex is a useful guide for investors in the stock market. If the Sensex is rising, investors are optimistic about the future performance of the economy and it is an appropriate time for investment.

Question 10.
Name some index numbers. Where can we get these index numbers?
Following arc the widely used index numbers:

• Wholesale price index
• Consumer price index
• Index of industrial production
• Agricultural production index.
• Producer price index.
• SENSEX.

These index numbers are available in an economic survey, conducted every year by the Government of India.

VI. Answer the following questions in about twelve sentences (each question carries 4 marks)

Question 1.
Explain the features of index numbers.
The following are the characteristics or features of index numbers:
(a) Index numbers are specialized averages: These are have considered as specialized averages. An average is a single figure representing a group of figures. To obtain an average. the items must be comparable Index numbers are also one type of averages that show in a single figure. the change in two or more series of different ìtcms that can be expressed in different units.

(b) Index numbers measure the net change in a group of related variables: As index numbers are also averages. the describe in one single numerical value i.e. increase or decrease in a group of related variables under study. The group of variables may be the prices of a set of commodities, the volume of production in different sectors, etc.

(c) Index numbers measure the effect of changes over a period of time: Index numbers are most widely used for measuring changes over a period of time. For example, we can compare agricultural production, industrial production, imports, exports, wages, etc. during two different periods.

(d) Index numbers are expressed in percentages: The changes in magnitude are expressed in tonnes of percentages which are independent of the units of measurement. This facilitates the comparison of two or more index numbers in different situations.

(e) Index numbers measure and permit comparison of the prices of certain goods: Quantity index numbers measure the changes in the physical volume of production, construction, or employment.

Question 2.
Mention the difficulties in the construction of the consumer price index.
The following are the difficulties encountered during the construction of the consumer price index:
(a) Index numbers are not based on all items: As index numbers are generally based on a couple of samples, it is not possible to take into account each and every item in the construction of the index.

(b) Index numbers are not free from error: In every stage of the construction of index numbers, starting from the selection of commodities to the choice of formulae there is a chance of an error being introduced. It is also said that index numbers are also a special type of averages since the various averages like mean, median, and mode and have their relative limitations which may lead to some errors.

(c) Index numbers are meant for a particular purpose: An index number is used to measure the change for a particular purpose only.

(d) Prices used in the construction of the cost of the living index are retail prices, which vary from shop to shop, place to place, and consumer to consumer. Therefore, index numbers prepared on such prices cannot be used for different places or different classes of people.

(e) Index numbers include so many commodities of unstable quality, which can not be used at different points of time.

(f) The ratio of expenditure on different products at different points of time and by various persons are not the same and they create difficulties in the construction of cost of living index numbers.

Question 3.
Calculate the weighted average of the Price Relative Index from the following data. (N-2018)

Calculation of heighted average of Price Relative Index
P01 = $$\frac{\Sigma \mathrm{W}\left[\frac{p_{1}}{p_{0}} \times 100\right]}{\Sigma W}$$
or
$$\frac{\Sigma \mathrm{WR}}{\Sigma \mathrm{W}}=\frac{15600}{100}$$ = 156
P01 = 156

Question 4.
Write a note on SENSEX.
Sensex is the short form for the Bombay Stock Exchange Sensitive Index with 1978-79 as a base. The value of the Sensex is with reference to this period. It is the benchmark index for the Indian stock market. It consists of 30 stocks which represent 13 sectors of the economy and the companies listed are leaders in their respective industries. If the Sensex rises, it indicates that the market is doing well and investors expect better earnings from companies. It also indicates the growing confidence of investors in the basic health of the economy.

Further, the sensitive index is a market capitalization of the weighted index of a sample of large, well-established, and financially sound companies. It is the oldest index in India and has acquired a unique place in the collective consciousness of investors. This index is widely used to measure the performance of the Indian stock market. It is the pulse of the Indian capital market.

Question 5.
Calculation of cost of living Index or Consumer Price Index is calculated as follows:

Calculation of cost of living Index or Consumer Price Index is calculated as follows:
CPI = $$\frac{\Sigma \mathrm{WP}}{\Sigma \mathrm{W}}=\frac{3922.5}{31}$$
CPI = 126.531
Comment: It means that there is an increase in prices by 26.53%.

Question 6.
Calculate index numbers from the following data by the Laspeyres method.

To calculate Laspeyres index, we need to find some of p1q0 p1,q0 Laspeyre’s Method

 Commodity p0 q0 p1 q1 p1q0 p1q0 A 8 5 10 11 50 40 B 8.5 6 9 9 54 51 C 9 4 12 6 48 36 152 127

p01 = $$\frac{\Sigma p_{1} q_{0}}{\sum p_{0} q_{0}}$$ × 100
= $$\frac{152}{127}$$ × 100
p01 = 119.68

Question 7.
Calculate Paasche’s index numbers from the following data.

 Item Po Q0 P1 Q1 A 6 50 10 56 B 2 100 2 120 C 4 60 6 60 D 10 30 12 24 E 8 40 12 36

To calculate Paasche’s index, we need to find some of p1q1, and p0q1

 Item Po % p1 q1 p1q1 p0q1 A 6 50 10 56 560 336 B 2 100 2 120 240 240 C 4 60 6 60 360 240 D 10 30 12 24 288 240 E 8 40 12 36 432 288 1880 1344

p01 = $$\frac{\Sigma p_{1} q_{1}}{\Sigma p_{0} q_{1}}$$ × 100 = $$\frac{1880}{1344}$$ × 100 = 1.398 × 100
P01 = 139.8

VII. Answer the following in about twenty sentences (each question carries 6 marks)

Question 1.
Explain the uses of index numbers.
Index numbers are very useful to record changes in output, income, employment, productivity, business activities, etc. Index numbers are applied to measure variations in almost all sectors of an economy.

The uses of index numbers are as follows:
(a) Useful in policymaking: Index numbers are very essential for the government. They help in studying trends of various sectors, and these trends and tendencies are the basis on which the economic policies are made. They are also useful in wage negotiation, formulation of income policy, price policy, rent control, taxation, and general economic policy formulation.

(b) Helpful in studying trends: Since index numbers are most widely used for measuring changes over a period of time, the time series so formed enable us to study the general trends of the phenomenon under study.

(c) Useful to measure the rate of inflation: The WPI is widely used to measure the rate of inflation. If inflation is very7 high, money may lose its value. Its primary impact lies in lowering the value of money. So, the study of index numbers will help us in taking appropriate measures to tackle this problem.

(d) The CPI is used in calculating the purchasing power of money and real wages.

(e) The index of industrial production gives us a quantitative figure about the changes in production in the industrial sector.

(f) Agricultural production index provides us a ready reckoner of the performance of the agricultural sector.

(g) Sensex is a useful guide for investors in the stock market. If Sensex is rising, investors are optimistic about the future performance of the economy and think it is an appropriate time investment.

Question 2.
Explain the difficulties in the construction of the Consumer Price Index number.
The following are the difficulties in the construction of the Consumer Price Index:
(a) Index numbers are not based on all items: As index numbers are generally based on a sample, it is not possible to take into account each and every item in the construction of the index.

(b) Index numbers are not free from error: In every stage of the construction of index numbers, starting from the selection of commodities to the choice of formulae there is a change of an error being introduced. It is also said that index numbers are also a special type of averages, since the various averages like mean, median and mode, and have their relative limitations which may lead to some errors.

(c) Index numbers are meant for a particular purpose: An index number is used to measure the change for a particular purpose only.

(d) Prices used in the construction of the Cost of Living Index are retail prices, which vary from shop to shop, place to place, and consumer to consumer. Therefore, index numbers prepared on such prices cannot be used for different places or different classes of people.

(e) Index numbers include so many commodities of unstable quality, which can not be used at different points in time.

(f) The ratio of expenditure on different products at different points of time and by various persons, are not the same, and they create difficulties in the construction of Cost of Living Index Numbers.

Question 3.
Write short notes on CPI, WPI, and IIP.
(a) Consumer Price Index (CPI): The Consumer Price Index measure the average change in retail prices. It is also called as cost of living index. In India, three CPI’s are constructed. The} are CPI for Industrial workers, CPI for (new series), and CPI for Agricultural laborers. They are calculated every month to analyze the impact of changes in the retail prices on the cost of living of these three broad categories of consumers.

The CPI for Industrial workers and agricultural laborers is published by Labour Bureau, Shimla. The central statistical organization publishes the CPI number of Urban Non-Manual employees.

The weights, while calculating CPI, are given to major groups of goods and services. The food and beverages 45.86 %, fuel and light 6.84 %, housing 10.7 %, clothing, and footwear 6.53 %, pan, supari, tobacco, etc. 2.38 %, and miscellaneous 20.82 %.

(b) Wholesale price index (WPI): The Wholesale Price Index number indicates the change in the general price level. It does not have any reference consumer category. It does not include items pertaining to services like barber charges, repairing, etc.

The WPI also acts as an indicator of changes in the economy. In India, the first wholesale price index number was compiled in 1947. The latest wholesale price index number in India is constructed with 2004-05 as the base year.

The WPI is the only price index in India, which is available on weekly basis with the shortest time gap of two weeks. Due to this reason, it is widely used in business and industry and by the Government. It is also taken as an indicator of the inflation rate in the economy.

In India, the commodities trade on a wholesale basis are of three categories viz., primary articles, consisting of 102 items and have weights of 20.1 %, energy articles, consisting of 19 items with weightage of 14.9 %, and manufactured articles consisting of 555 items with 65 % of weightage.

(c) Index of industrial production (IIP): The Index number of Industrial Production measures changes in the level of industrial production comprising many industries. It includes the production of both public and private sectors. It is a weighted average of quantity relatives.

The IIP is calculated with the help of following formula:
IIP02 = $$\frac{\Sigma q_{1} \times \mathrm{W}}{\Sigma \mathrm{W}}$$ × 100

In India, it is currently calculated every month with 2004-05 as the base year.

While calculating Industrial Production Index, weights are given to each category of industries. Mining and quarrying is 14.2 %, manufacturing is 75.5 % and Electricity’ is given 10.3 %.

Question 4.
Explain the uses of Consumer Price Index numbers.
The consumer price index, also known as the cost of living index, measures the average change in retail prices.

The uses of consumer price index number are as follows:
(a) Useful in policymaking: Index numbers are very essential for the government. They help in studying trends of various sectors, and these trends and tendencies are the basis on which the economic policies are made. They are also useful in wage negotiation, formulation of income policy, price policy, rent control, taxation, and general economic policy formulation.

(b) Helpful in studying trends: Since index numbers are most widely used for measuring changes over a period of time, the time series so formed enable us to study the general trends of the phenomenon under study.

(c) Useful to measure the rate of inflation: The WPI is widely used to measure the rate of inflation. If inflation is very high, money may lose its value. Its primary impact lies in lowering the value of money. So the study of index numbers will help us in taking appropriate measures to tackle this problem.

(d) The CPI is used in calculating the purchasing power of money and a real wage.

Question 5.
Calculate Price Index Number by:
(a) Laspeyres method
(b) Paasche’s method.

 Commodity 1990 1995 Price Quantity Price Quantity A 20 15 30 20 B 15 10 20 15 C 30 20 25 10 D 10 5 12 10

Laspeyres Method:
p01 = $$\frac{\Sigma p_{1} q_{0}}{\Sigma p_{0} q_{0}}$$ × 100
= $$\frac{1210}{1100}$$ × 100
= 1.1 × 100
p01 = 110

Paasche’s method:
p01 = $$\frac{\Sigma p_{1} q_{1}}{\sum p_{0} q_{1}}$$ × 100
= $$\frac{1270}{1025}$$ × 100
= 1.239 × 100
p01 = 123.9

VIII. Project-oriented question (5 marks)

Question 1.
Record the daily expenditure, quantities bought and prices paid per unit of the daily purchases, such as rice, Joor dal, tomato, onion, and milk of your family for two weeks. How has the price change affected your family? (S-2018)(N-2018)
The following table shows the list of items with quantities purchased by a family:

 Items Quantities (W) Price Paid (I Week) P0 Price Paid (II Week ) P1 Rice 4 kgs 200 210 Toor dal 1 kg 100 80 Tomato 2 kgs 120 180 Onion 1 kg 40 40 Milk 7 litres 210 210

Now we need to calculate CPI by calculating price relative with the help of formulae.

 Commodities Q0 (W) (Po) Pi $$\mathbf{R}=\frac{p_{1}}{p_{0}} \times \mathbf{1 0 0}$$ RW Rice 4 200 210 105 420 Toor dal 1 100 80 80 80 Tomato 2 120 180 150 300 Onion 1 40 40 100 100 Milk 7 210 210 100 700 15 1600

Calculation of Living Index or Consumer Price Index is calculated as follows:
CPI = $$\frac{\Sigma \mathrm{WP}}{\Sigma \mathrm{W}}=\frac{1600}{15}$$ = 106.66
CPI = 106.66
Comment: It shows that there is an increase in price by 6.66%. which has a little effect on the standard of living.