INDEX NUMBER

1. Meaning and Definition of an Index Number :

In practice the changes are observed in the price of a commodity,

imports, industrial production, unemployment etc. as time
changes. It is obvious that such changes can neither be uniform
nor in the same direction. Variables like population, price of a
commodity, industrial production etc. increase with time, while
variables like death rate, value of money decrease with time. The
analytical study of such changes is essential for future planning.
The average being an absolute measure cannot be used to compare
the changes like these, and hence some relative measure should
be used for a proper comparison of such changes. Index number
is such a relative measure with the help of which relative changes
over a period of time can be studied. Index numbers are the
indicators which reflect changes over a specified period of time in
the values of a variable or a group of variables. According to Spigel,
An Index Number is a statistical measure designed to show
changes in a variable or a group of related variables with respect
to time, geographic location or other characteristics. It may be
described as a specialised average designed to measure the change
in level of a phenomenon with respect to time or place. It is a ratio
which shows the changes in the magnitude of a variable over a
period of time. For example if the price of rice in 1998 is ` 2000

7
per quintal and it is ` 3000 per quintal in 2002 then the ratio of
changes in price i.e. the index number of the price of rice in 2002
compared to that in 1998 can be given by

396 STATISTICS (CPT)

 Pr ice in 2002
Index number =
Pr ice in 1998  100

3000
=  100  150
2000
Hence it can be concluded that the percentage increase in the price of rice is 50 percent compared
to that in 1998. Similarly index number of industrial production, index number of wages etc. can
be constructed.

Prices of different commodities are expressed in different units. e.g. prices of wheat and rice in
` per quintal, price of cloth in ` per metre, price of kerosene in ` per litre etc. An Index number
being a ratio is independent of units, and hence an average relative change in the prices of all
these commodities can be found out. Thus an Index number can be defined as follows:

An Index number is a numerical expression showing relative percentage changes in the

value of a variable from one period to another. The period for which the index number is
calculated is called the current period and the period with which the comparison is made is
called the base period.

2. Characteristics of Index Number:

The following are the main characteristics of index numbers:

(1) Index numbers show relative percentage change in a variable or a group of variables.

(2) Index number is a specialised average and hence it shows an average change.

(3) It is a weighted average.

(4) In the study of phenomena which remain constant index numbers are not useful.

(5) If the variables are expressed in different units, the comparison can be made by index
numbers.

3. Uses of Index Numbers:

Index number indicates the relative percentage change in the value of a variable from one
period to another. Index numbers are very useful in studying the changes in production,
employment, import, export etc. Index numbers are also useful in studying the political and
social changes. Thus index numbers are useful wherever changes in the value of phenomena
are to be measured.

The following are the main uses of index numbers:

(1) For framing suitable economic and business policies. The cost of living index numbers are
useful in deciding dearness allowance, bonus etc. For solving the problem of unemployment,
INDEX NUMBER 397
 index numbers of employment can be used. Index numbers of industrial production give
useful guidance in framing industrial policies and tax structure.
(2) Index numbers are very useful in deflation. The real wages can be obtained from the given
wages by adjusting them, using cost of living index numbers.
(3) Index numbers are also useful in studying trends of a series, which helps in effective
forecasting. The future pricing and demand can be adjusted.
(4) Different index numbers have different purposes. Wholesale price index numbers help us
in measuring purchasing power of money. Index numbers of industrial production can be
used for framing industrial policies. Balance of foreign trend can be judged from index
numbers of export and import. The suitable agricultural policies can be framed using index
numbers of agricultural production.
(5) From the study of all index numbers, we can forecast the future economy of a country.
Index numbers are rightly called the barometer of economic activities.
4. Limitations of Index Numbers :
We have seen that index numbers are very useful to study the economic changes, however the
following limitations of index numbers should be pointed out:
(1) As the index number is constructed from a sample results. Sampling errors may therefore
creep in.
(2) Index number obtained for one purpose cannot be used for another purpose.
(3) In construction of index numbers only selected items are included hence they do not give
real picture. Only the trend can be judged.
(4) Different formulae of index numbers give different results. This creats confusion.
(5) Index number is one type of average, hence it bears limitations of an average.
5. Construction of Index Number :
The following important steps should be considered in constructing an index number.
(i) Purpose
(ii) Selection of commodities, their number and their price quotations
(iii) Selection of base year
(iv) Selection of the average
(v) Selection of appropriate weights
(vi) Selection of an appropriate formula.
(i) Purpose : We should have a clear understanding about the purpose of constructing an
index number. Each index number has a particular use. The whole—sale price index number
cannot be used to study the cost of living of working class people or the middle class
families. Similarly an index number of the industrial production can never be used to

398 STATISTICS (CPT)

 study the changes in the agricultural production. The other points like selection of items,
selection pf base year etc. can not be decided unless the purpose of constructing an index
number is not carefully decided. It may lead us to confusion and merely waste our time
and will not bring any fruitful results. Thus deciding about the purpose of constructing an
index number is of vital importance.
(ii) Selection of commodities, their numbers and price quotations : Once the purpose of
constructing an index number is decided, only those commodities which are relevant to
our purpose should be selected. It is not possible to include each and every item available
in the market in the construction of index number. Hence those items are selected which
represent the tastes, habits, customs, etc. of the people for whom the index number is
meant for.
The number of items should neither be too large nor too small. There can not be any hard
and fast rule for the exact number of items to be included. The larger the number of items
the more reliable would be the results. But if more number of items are to be included, we
have to spend more time, money and energy and also the computational part may become
tedious. If the number of items is small, the index number may not serve the purpose and
hence the number of items selected should be in consistent with the purpose, resources of
fund and the availability of time.
(iii) Selection of Base Period : After selecting the commodities and collecting the price
quotations, the most important step is to select the base year or base period. We know that
index number measures the relative changes in the level of a phenomenon as compared to
some other period. The period with which the comparison in the levels of phenomena is
made is termed as base period. The base period or the base year must be a normal year,
free from abnormal events like inflation, depression, war, flood emergency etc. otherwise
the comparison may not be appropriate. Moreover, for an effective comparison the base—
period should not be too far from the given period. The index number of the base year is
taken as 100.
(iv) Selection of the Average : In construction of index number we find out price relative of
different commodities. Out of number of such price relatives, we have to find out an average
i.e. a single value which may represent all the values. There are various measures of averages.
The arithmetic mean is generally considered as a good measure of average. But it is highly
influenced by extreme observations, and also it does not satisfy reversal tests. Hence it is
not advisable to use arithmetic mean. Median is a positional average and it does not take
into consideration all observations.
Hence it may not be regarded as a good average for index number. Mode is a very poor measure
of average, and naturally its use is not desirable. In index number problems, geometric mean is
considered as the most appropriate average. The following are chief advantages of using
geometric mean as a measure of average in index number problems.
(1) it measures relative changes.
INDEX NUMBER 399
 (2) it is not highly influenced by extreme observations
(3) the index number calculated by using geometric mean satisfies reversible tests.
Thus geometric mean is the most appropriate average for index numbers. However in practice,
due to computational difficulties arithmetic mean is generally preferred.
(v) Selection of Weights : Selection of appropriate weights is very important and
simultaneously very difficult to decide. The term weight refers to the relative importance
of the commodity. All items like wheat, rice, clothing, fuel, etc. are not of equal importance.
So proper weights should be assigned to them taking into consideration their relative
importance.
(vi) Selection of an Appropriate : Formula There are many formulae available for the
construction of an index number. Any one formula dannot be regarded as the best for all
purposes. The selection of the formula depends upon the availability of information and
the purpose of construction. The following are some of the formulae for unweighted and
weighted indices.
Unweighted Index Numbers:
In this method the price or quantity or value of a commodity is expressed as a percentage of
price or quantity or value of that commodity of the base year.

P1
e.g. Price relative =
P0 x 100

Q1
Quantity relative =
Q 0 x 100

V1
Value relative =
V0 x 100

Price relative method : According to this method the index number is obtained by avenging
price relatives of different commodities.
The formula can be given as

P1
P  100
0
I01  wheren is the total number of items.
n
Illustration 1: Obtain Index number of 2002 laking 2001 as the base year by price relative
method.

400 STATISTICS (CPT)

 Commodity Price in Price in
2001 2002
A 60 90
B 40 50
C 50 60
D 100 124
E 80 100
Ans :

Commodity Price in Price in Price relatives

P1
2001 2002 ×100
P0
P0 P1

A 60 90 150

B 40 50 125

C 50 60 120

D 100 124 124

E 80 100 125

P1 644
P  100 644
I01  0 =
n 5
= 128.8

Weighted Index Numbers

(1) Aggregate Expenditure Method : In this method the aggregate expenditure of the current year

 p1q0 is obtained by taking the sum of products of the current year price P1 and base year
quantity qo of each commodity and the aggregate expenditure of the base year q 0 is obtained
by taking the sum of the products of price of the base year P0 and quantity of the base year The
ratio of the two aggregate expenditures expressed in percentage gives the index number by
aggregate expenditure method. The formula can be given as follows :
p q1 0
Index number = ×100
p q0 0
where p1 = price of the current year

p0 = price of the base year

q0 = quantity of the base year.

INDEX NUMBER 401

 This formula based on the base year’s quantity is also known as Laspeyre’s formula. Paasche
used current year’s quantity instead of base year’s quantity and his formula is

p q 1 1
×100
Index Number =
p q 0 1

Where q1 is quantity of the current year.

Illustration 2 : Calculate Laspeyre’s and Paasche’s index numbers from the following data:

Commodity Base year Current year

Quantity Price Quantity Price

A 12 10 15 12

B 15 7 20 5

C 24 5 20 9

D 5 15 5 14

Ans :

Let us denote

price of the base year = p0 price of the current year = P1

quantity of the base year = q0 quantity of the current year = q1

Base year Current year

Comm-Quantity Price Quantity Price p1q0 poq o P1q1 P0q1

odity q0 p0 q1 p1

A 12 10 15 12 144 120 180 150

B 15 7 20 5 75 105 100 140

C 24 5 20 9 216 120 180 100

D 5 16 5 14 70 80 70 80

505 425 530 470

p q
1 0
× 100
Laspeyre’s Index Number =
p q
0 0

505
= × 100 = 118.8
425

402 STATISTICS (CPT)

 p q1 1
× 100 = 530
× 100 = 112.8
Paasche’s Index Number =
p q0 1 470
(2) Weighted Average of price relatives OR Family Budget Method : Under this method the
price relatives of all items are calculated by comparing prices of the current year with prices of
the base year. The price relatives are denoted by 1.

Price of the current year p1

i.e. I = ×100 = ×100
Price of the base year p0

The Index number is then obtained as a weighted average of price relatives. Weights are
sometimes given explicitly according to the importance of the items, otherwise the expenditure
of each item, in the base year P0q0 is found out and it is taken as the weight W of that item. In
fact P0q0 is the contribution of that item in the aggregate expenditure  p 0 q0

 Iw p1
×100 W = p q
 Index number = where I =
w p0 0 0

Illustration 3: Construct index number from the following data :

Item Weight Index Number
Food 48 350
Clothing 15 230
Fuel 10 190
House rent 12 160
Miscellaneous 15 210
Ans. : As the price relatives and weights are given, we shall use family budget method.
Item Weight (W) Index (I) IW
Food 48 350 16800
Clothing 15 230 3450
Fuel 10 190 1900
House rent 12 160 1920
Miscellaneous 15 210 3150
100 27220

 Iw 27220
Index Number = = = 272.20
w 100

Illustration 4 : Construct index number for the year 1970, taking 1952 as the base year using (i)
Aggregate expenditure method (ii) Family budget method.

INDEX NUMBER 403

 Quantity Price Price
Commodity Unit Consumed (in `) (in `)
in 1952 1952 1970
Rice Kg. 10Kg. 1.50 2.00
Wheat Kg. 20 Kg. 0.75 1.00
Pulses Kg. 10 Kg. 1.25 2.00
Oil Kg. 6Kg. 2.00 5.00
Clothing Metre 15 Metres 2.50 4.00
Kerosene Litre 18 Litres 0.50 0.60
House rent 1 50.00 7500
Ans. :
Take 1952 as the base year.
Quantity of the base year = q0
Price of the base year = p0
Price of the current year = p1
(i) Aggregate Expenditure Method:
Price in Price in
Commodity Quantity 1952 1970 p0 q 0 P1 q 0
in 1952q0 p0 p1
Rice 10 1.50 2.00 15.00 20.00
Wheat 20 0.75 1.00 5.00 20.00
Pulses 10 1.25 2.00 12.50 20.00
Oil 6 2.00 5.00 12.00 30.00
Clothing 15 2.50 4.00 37.50 60.00
Kerosene 18 0.50 0.60 9.00 10.80
House rent 1 50.00 75.00 50.00 75.00
151.00 235.80

p q
1 0
×100 235.80
×100 = 156.16
Index Numebr = =
p q
0 0 151.00

404 STATISTICS (CPT)

 (ii) Family Budget Method :
p1
Commodity Quantity Price Price I= ×100 W= p0q0 IW
p0
(in `) (in `)

1952 1952 1970

Rice 10 1.50 2.00 133.33 15.00 2000

Wheat 20 0.75 1.00 133.33 15.00 2000

Pulses 10 1.25 2.00 160.00 12.50 2000

Oil 6 2.00 5.00 250.00 12.00 3000

Clothing 15 2.50 4.00 160.00 37.50 6000

Kerosene 18 0.50 0.60 120.00 9.00 1080

House rent 1 50.00 75.00 150.00 50.90 7500

151.00 23580
 IW 23580
Index Number = = = 156.16
W 151.00
6. Methods of Calculating Index Numbers

We have discussed the weighted index number of price relatives. Apart from this, there are
other methods of weighted aggregate index numbers. Many formulae based on different weighing
system for constructing index numbers are available. Some important of them are as follows:

1. Laspeyre’s Method

2. Paasch&s Method

3. Dorbish and Bowley’s Method

4. Fisher’s Index Number

5. Marshall - Edgeworth’s Method

(1) Laspeyre’s Method : This method is named after a German Economist Laspeyre who
formulated it in 1871. In this method the base year quantities are taken as weights. The
formula for constructing Laspeyre’s index number is

 p1q 0
L = x100
 p 0q 0

INDEX NUMBER 405

 In this method the expenditure of each item of the base year p0q0 is found out and the
expenditure on all items that is the aggregate expenditure of the base year. p q0 0 is

obtained. Similarly p q1 0 i.e. the aggregate expenditure of the current year is obtained.
Here the quantities of the base year are taken as weights for finding the aggregate
expenditure. The ratio of aggregate expenditures of current year and base year expressed
in percentage is Laspeyre’s Index number.
(2) Paasche’s Method : This method is named after a German statistician Paasche who
formulated it in 1874. The quantities of the current year are taken as the weights in this method.
The formula for constructing Paasche’s Index number is,

 p1q1
P =
 p 0q1 x 100
In this method the expenditure of each item of the base year p0q1 is found out and from the
expenditures of all items the aggregate expenditure of the base year  p 0q1 is obtained.
Similarly  p1q1 i.e. the aggregate expenditure of the current year is obtained. Here the quantities
of the current year are taken as weights for finding aggregate expenditures. The ratio of aggregate
expenditures of current year and base year expressed in percentage is Paasche’s Index number.
(3) Dorbish and Bowley’s Method : Dorbish and Bowley in 1901 suggested to take the
arithmetic mean of the Laspeyre’s and Paasche’s index numbers, so that the influence of both
base as well as the current years can be taken into account. According to this method the
formula of the index number can be given as,

1 1   p1q0  p1q1 
B = (L + P) =   
2 2   p0 q0  p0 q1  x 100

(4) Fisher’s Ideal Index Number : The geometric cross formula for price index is also known
as Walsh price index. He gave this formula in 1901. In 1920, Inrving Fisher called it an ideal
formula for index Number. So, it is also called Fisher’s Ideal Index Number. According to this
method, index Number is

 p1q0  p1q1
F = = x
L P  p0 q0  p0 q1 x 100

This index number is said to be an ideal index number because of the following reasons:
(1) Jt takes into account the price and quantity of both the base and the current years.

(ii) Fisher’s ideal index number is geometric mean of the Laspeyre’s and Paasche’s index
numbers and the geometric mean is theoretically considered to be the best average for
constructing index numbers.

(iii) It is free from bias. Laspeyre’s and Paasche’s formulae, consisting the upward and

406 STATISTICS (CPT)

 downward biases are nullified by taking the geometric mean.

(iv) It is the only formula which satisfies the two important tests i.e. The Time Reversal Test’
and ‘The Factor Reversal Test.’
(5) Marshall—Edgeworth’s Method : Marshall—Edgeworth suggested to take the arithmetic
mean of the quantities of the base year and the current year as weights. The formula for
constructing the index number is given below :

 p1(q0  q1 )  p1q0   p1q1

M =
 p0 (q0  q1 ) x 100 or M =
 p0 q0   p0 q1 x 100

Quantity Index Numbers:

We have so far discussed price index numbers. Price index numbers are useful in comparing
prices. For comparing quantities, quantity index numbers are used. An index number of quantity
measures the change in the volumes of the commodities sold at a fixed price. To construct
quantity index numbers, the prices are takan as weights and are multiplied to the quantities.
The formulae of quantity index numbers can be obtained from the formulae of price index
numbers by interchanging p by q and q byp. The following formulae can easily be obtained.
Unweighted index number by quantity relative method

q1
 x100
q0 where n is the total number of items.
Q01 
n
Weighted Index Numbers
Laspeyre’s method

 q1p0
Q01 
 q0p0 x 100

Paasche’ s method

 q1p1
Q01 
 q0p1 x 100
Dorbish and Bowley method

 q1p0  q1p1

 q0p0  q0p1 x 100
Q01 
2
Fisher’s ideal method

INDEX NUMBER 407

  q1p0  q1p1
Q01  x
 q0p0  q0p1 x 100

Marshall Edgeworth method

 q1(p0  p1 )
Q01 
 q0 (p0  p1 ) x 100

 q1p0   q1p1

 q0p0   q0p1

Illustration 5 : Calculate the index numbers from the following data by using formula of
Laspeyre, Paasche, Fisher, Dorbish - Bowley and Marshall - Edgeworth.
Commodity Base year Current year
Pirce Quantity Price Quantity
A 6 50 10 60
B 2 40 2 50
C 4 100 6 120
D 10 12 30 24
Ans :
Base year Current year

Price Quan. Price Quan. p0q0 p1q0 p1q1 p0q1

(in `) (in kg.) (in `) (in kg.)

p0 q0 p1 q1

A 6 50 10 60 300 500 600 360

B 2 40 2 50 80 80 100 100

C 4 100 6 120 400 600 720 480

D 10 12 30 24 120 360 720 240

Total 900 1540 2140 1180

Laspeyre’s Index Number

L
p q
1 0
 100 1540
×100 = 171.11
=
p q
0 0 900

408 STATISTICS (CPT)

 Paasche’s Index Number

P=
p q
1 1
×100 2140
×100 = 181.36
=
p q
0 1 1180
Dobrish-Bowley’s Index Number

1 1
B= (L + P) =  (171.11+ 181.36) = 176.23
2 2
Fisher’s Index Number

F= L P = 171.11 181.36 = 176.16

Marshall - Edgeworth’s Index Number

p q + p q
1 0 1 1
×100 1540 + 2140
×100
M= =
p q + p q
0 0 0 1 900 +1180

3680
= ×100 = 176.92
2080
Illustration 6 : Calculate quantity index numbers from the following data by using Laspeyres,
Paasche, Fisher, Dorbish-Bowley and Marshall-Edgeworth’s fromula.
Commodity Base year Current year
Price Quantity Price Quantity
A 8 20 9 20
B 10 6 12 10
C 40 1 50 1
D 4 3 5 5
E 12 4 20 5

Ans.
Commodity p0 q0 p1 q1 p0q0 p1q0 p1q1 p0q1
A 8 20 9 20 160 180 180 160
B 10 6 12 10 60 72 120 100
C 40 1 50 1 40 50 50 40
D 4 3 5 5 12 15 25 20
E 12 4 20 5 48 80 100 60

320 397 475 380

INDEX NUMBER 409

 Laspeyre’s Quantity Index Number

Q01 =
q p
1 0
 100 380
×100
=
q p
0 0 320
=118.75
Passche’s Quantity Index Number

Q01 =
q p
1 1
×100 475
×100
=
q p
0 1 397
= 119.65
Dorbish Bowley’s Quantity Index Number

q p
1 0
+
q p 1 1
1.1875 + 1.1965
Q01 =
q p
0 0 q p 0 1
×100 =
2
×100 = 119.2
2
Fisher’s Quantity Index Number

Q01 =
q p  q p
1 0 1 1
×100 = 118.75  119.65 = 119.2
q p q p
0 0 0 0

Marshall-Edgeworth’s Quantity Index Number

Q01 =
q p + q p
1 0 1 1
×100 380 + 475
×100
= = 119.25
q p + q p
0 0 0 1 320 + 397

7. Tests of Adequacy of I. N. Formulae

Various formulae are used for calculating index numbers. Prof. Irving Fisher has suggested the
following tests to be satisfied by a good index number.

(1) Unit Test

(2) Time Reversal Test

(3) Factor Reversal Test

(4) Circular Test.

(1) Unit Test : This test requires that the formula for constructing an index number should be
free from units of measurements. Practically all index numbers except simple unweighted
aggregative index numbes satisfy this test.

(2) Time Reversal Test : According to Fisher “The formula for calculating an index number

410 STATISTICS (CPT)

 should be such that it gives the same ratio between one point of comparison and the other, no
matter which of the two taken as the base.” In other words if the base periods are interchanged
the two index numbers should be reciprocal to each other.

Thus if I01 represents the given index number and ho, the index number after changing base
year and current year, then the Time Reversal Test demands that

I01 x I10 = 1
Now let us apply Time Reversal Test to different index numbers.
(i) Laspeyre’s Index Number :
According Laspeyre’s formula

I01 =
p q 1 0

p q 0 0

Interchanging time 0 and 1 for the periods

I01 =
p q0 1

p q1 1

I01 × I10 =
p q × p q
1 0 0 1
1
 p q p q
0 0 1 1

So Laspeyre’s Index number does not satisfy Time Reversal Test.

(ii) Paasche’s Index Number :

According to Paasche’s formula

p q 1 1
I 01 =
p q 0 1

Interchanging time 0 and 1, we get

I01 =
p q0 0
I01  I10 =
p q  p q
1 1 0 1

p q1 0
 p q p q
0 1 1 0
1
So, Paasche’s Index number does not satisfy Time Reversal Test.
(iii) Fisher’s Index Number:
According to Fisher’s formula

INDEX NUMBER 411

 I01 
p q  p q
1 0 1 1

p q p q0 0 0 1

Interchanging time 0 and 1, we get

I10 
p q  p q
0 1 0 0

p q p q1 1 1 0

I01  I10 
 p q  p q  p q  p q
1 0 1 1 0 1 0 0
= 1 =1
p q p q p q p q
0 1 0 1 1 1 1 0

So, Fisher’s Index number satisfies Time Reversal Test.

(iv) Dorbish and Bowley’s Index Number:

1 1   p1q0  p1q1 
I01 = (L + P) =  + 
2 2   p 0 q0  p0 q1 

Interchanging time 0 and 1, we get

1   p 0 q1  p0 q0 
I10 =  + 
2   p1q1  p1q0 

1   p1q0  p1q1  1   p 0 q1  p0 q0 
I01 ×I10 =  + ×  +  1
 2   p0 q0  p 0q1  2   p1q1  p1q0 

So, Dorbish and Bowley’s Index number does not satisfy Time Reversal Test.
(v) Marshall — Edgeworth’s Index number:

I01   p (q1 0  q1 )
 p (q0 0  q1 )

Interchanging time 0 and 1, we get

I10  
p0 (q1  q0 )
 p (q1 1  q0 )

I01  I10   p (q 1 0  q1 )

 p (q  q )  1
0 1 0

 p (q 0 0  q1 )  p (q  q )
1 1 0

Marshall—Edgeworth’s Index number satisfies Time Reversal Test.

412 STATISTICS (CPT)

 (3) Factor Reversal Test : The other test suggested by Fisher is Factor Reversal Test. According
to him, “Just as each formula should permit the interchange of the two times without giving
inconsistent results, soit ought to permit interchanging the prices and quantities without giving
inconsistent result i.e. the two results multiplied together should give the value ratio.”

In other words an index of price when multiplied by an index of quantity, with the same base,
given years and commodities should give the true value ratio i.e. if P01 is a price index for a
given year with reference to base year and by interchange the two factors price (p) and quantity
(q) we obtain Qoi as the quantity index for the current year with reference to the same base
year, then according to Factor Reversal Test

P01 × Q01 =
p q 1 1

p q 0 0

Let us apply this test to different index numbers.

(i) Laspeyre’s Index Number:

P01 =
p q 1 0

p q 0 0

Interchanging the two factors price (p) and quantity (q) we get,

Q01 =
p q 1 0

p q 0 0

P01 × Q01 =
p q × q p
1 0 1 0
 p q q p
0 0 0 0


p q
1 1

p q
0 1

So Laspeyre’s Index number does not satisfy Factor Reversal Test.

(ii) Paasche’s Index Number:

P01 =
p q 1 1

p q 0 1

Interchanging p and q we get

Q01 =
q p 1 1

q p 0 1

INDEX NUMBER 413

 P01 × Q01 =
p q × q p
1 1 1 1
 p q q p
0 1 0 1


p q 1 1

p q 0 1

So, Paasche’s Index number does not satisfy Factor Reversal Test.
(iii) Fisher’s Index Number:

P01 
p q  p q
1 0 1 1

 p q p q
0 0 0 1

Q01 =
q p × q p
1 0 1 1

q p q p
0 0 0 1

P01  Q01 =
p q × p q   q p
1 0 1 1 1 0

q p
1 1 p q
1 1
=
 q p p q q p
0 0 0 1 0 0 q p
0 1 p q
0 0

So, Fisher’s Index number satisfies Factor Reversal Test.

(iv) Dorbish and Bowley’s Index Number:

1   p1q0  p q 
1 1
P01   
2   p 0 q0  p q 
0 1

Interchanging p and q, we get

1   q1p 0 q p 1 1

Q 01    
2   q0p 0 q p 0 1


1   p1q0  p1q1  1   q1p 0  p1q1 

P01  Q01       
2   p0 q0  p0 q1  2   q0p0  q0p1 


p q 1 1

p q 0 0

414 STATISTICS (CPT)

 So, Dorbish and Bowley’s Index number does not satisfy Factor Reversal Test.
(v) Marshall—Edgeworth’s Index Number:

P01 =
 p q 1 0 + q1 
 p q 0 0 + q1 

=
p q  p q
1 0 1 1

p q  p q
0 0 0 1

Interchanging p and q we get,

Q01 =
q p  q p
1 0 1 1

q p  q p
0 0 0 1

P01  Q01 =
p q  p q   q p  q p
1 0 1 1 1 0 1 1

p q  p q  q p  q p
0 0 0 1 0 0 0 1


p q 1 1

p q 0 0

So, Marshall’s Index number does not satisfy Factor Reversal Test.

(4) Circular Test : This test is an extension of time reversal test. An index number is said to
satisty circular test if

I01 x I12 x I23 ............. x I (n-1)n

x Ino = 1

Laspeyre’s, Paasche’s, Fisher’s Index numbers do not satisfy this test simple aggregative index
number satisfies this test.

Illustration : 7 Calculate the index numbers L, P, B, F and M from the following data. Also
show that Fisher’s index number satisfies time reversal and factor reversal tests.
Base year Current year
Commodity Price Quantity Price Quantity
(in `) (in kg.) (in `) (in kg.)
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

INDEX NUMBER 415

 Ans :

Commodity p0 q0 p1 q1 p0q0 p1q0 p1q1 p0q1

A 6 50 10 56 300 500 560 336

B 2 100 2 120 200 200 240 240

C 4 60 6 60 240 360 360 240

D 10 30 12 24 300 360 288 240

E 8 40 12 36 320 480 432 288

Total 1360 1900 1880 1344

Laspeyre’s Index Number

L
p q 1 0
 100
p q 0 0

1900
= ×100 =139.71
1360
Paashe’s Index Number

P=
p q 1 1
×100 1880
×100
= =139.88
p q 0 1 1344
Fisher’s Index Number

F  L P = F = 139.71×139.88 = 139.88

Dorbish - Bowley’s Index Number

1 1
B = (L + P) 139.71+ 139.88  = 139.79
2 2
Marshall-Edgeworth’s Index Number

 p q + p q
1 0 1 1
×100
M=
p q + p q
0 0 0 1

1900 + 1880 3780

= ×100 = ×100 = 139.79
1360 + 1344 2704
For, Fisher’s Index Number

416 STATISTICS (CPT)

 Time Reversal Test :

I01  I10 
p q  p q  p q  p q
1 0 1 1 0 1 0 0

p q p q p q p q
0 0 0 1 1 1 1 0

1900 1880 1344 1360

= × × ×
1360 1344 1880 1900
= 1
So, this test is satisfied by Fisher’s Index Number.
Factor Reversal Test :

P01  Q01 =
p q  p q
1 0 1 1

q p  q p
1 0 1 1

p q p q
0 0 0 1 q p q p
0 0 0 1

1900 1880 1344 1880

× × ×
1880 p q
1 1
= = =
1360 1334 1360 1900 1360 p q
0 0

So, this test is also satisfied by Fisher’s Index Number.

Selection of Base Year : We know that index number measures the relative changes in the
level of a phenomenon as compared to some other period. The period with which the comparison
in the levels of phenomena is made is termed as base period. The base period or the base year
must be a normal year, free from abnormal events like inflation, depression, war, flood
emergency etc. otherwise the comparison may not be appropriate. Moreover, for an effective
comparison the base—period should not be too far from the given period. The index number of
the base year is taken as 100. There are two ways of selecting the base year: (i) Fixed base
method (ii) Chain base method.

(i) Fixed Base Method : In this method one particular year is fixed up and is taken as the base
year and the index numbers of the other years are calculated by comparing prices with this
year.

Thus, according to fixed base method

Pr ice of the current year

Index Number 
Pr ice of the base year

P1
= ×100 where p0 = price of base year
P0

p1 = price of current year

INDEX NUMBER 417

 This index number can also be called price relative.
Illustration 8 : Construct index number of different years with 1951 as the base year from
the following data :
Year 1951 1952 1953 1954
Price (in `) : 12 15 24 30
Ans. : 1951 is the base year. Therefore, its index number is taken as 100.
Now index number of 1952

Price of 1952 15
= ×100 = ×100 = 125
Price of 1951 12
Index number of 1953

Price of 1953 24
= ×100 = ×100 = 200
Price of 1951 12
Index number of 1954

Price of 1954 30
= ×100 = ×100 = 250.
Price of 1951 12

In the fixed base method the price of the base year remains constant, and it is important for
maintaining uniformity for long term comparIson. This method is more suitable for Government
and public bodies like LIC, University, etc. However, common men and small business men are
more interested in short term comparison and hence for them this method may not be useful.
Moreover with the changes in tastes, habits and customs of people, new commodities are required
to be introduced and some commodities are required to be omitted which is not suitable in the
fixed base method.

(ii) Chain Base Method : In this method the preceding year is taken as the base year. The
common man and small businesmen are more interested in short term comparison, so this
method is suitable for them. The main advantage of this method is that new.conimodities can
be introduced and outdated commodities can be removed. Changes in the weightage of different
commodities can also be revised, if necessary.

In this method first of all ‘link relatives’ are obtained. For this thefigure of each year is compared
with the figure of preceding year and expressed in precentage. These link relatives are then
chai ned together by successive multiplication and chain indices are obtained. For this the
following formula is used chain index of

Current year link relative  chain index of previous year

Chain Index =
100
418 STATISTICS (CPT)
 Illustration 9 : Find chain base index numbers from the following data :
Year Price Link relatives Chain Index numbers
1991 12 100 100

15
1992 15 ×100 = 125 125
12

24 160 ×125
1993 24 ×100 = 160 = 200
25 100

30 125 × 200
1994 30 ×100 = 125 = 250
24 100

36 120 × 250
1995 36 ×100 = 120 = 300
30 100

45 125 × 300
1996 45 ×100 = 125 = 375
36 100

57 126.67 × 375
1997 57 ×100 = 126.67 = 405
45 100

60 105.26 × 405
1998 60 ×100 = 105.26 = 426.3
57 100
Illustration 10 : Covert the following fixed base index numbers into chain base index
numbers.
Year : 1945 1946 1947 1948 1949 1950
Index Number : 100 140 280 350 250 300
Ans. : The following formula is used to convert fixed base index number into chain base index
number.
Current year’s chain base index number

Current year's fixed base Index number

= × 100
Fixed base Index number of the previous year

In fixed base index number generally the first year is taken as teh base year. So taking 1945 as
the base year the index number of the year 1945 = 100
Now,
Chain base Index Number of 1946

INDEX NUMBER 419

 Fixed base index of 1946 140
= × 100 = ×100 = 140
Fixed base index of 1945 100
Similarly
Chain base Index Number of 1947

280
= ×100 = 200
140
Chain base Index Number of 1948

350
×100 = 125
280
Chain base Index Number of 1949

250
×100 = 71.43
350
Chain base Indexd Number of 1950

300
= ×100 = 120
250
Illustration 11 : Convert the following chain base index numbers into fixed base index
numbers.
Year : 1966 1967 1968 1969 1970
Index Number : 80 110 120 105 95
Ans. : The following formula is used to convert chanin base index number into fixed base
index number.
Fixed base Index number of the current year =

Chain base index of the current year ×Fixed base index of the previous year
100

110 × 80
 Fixed base Index number of 1967 =
100
= 88

120 × 88
Fixed base Index number of 1968 = = 105.60
100

105 ×105.60
Fixed base Index number of 1969 = = 110.88
100

420 STATISTICS (CPT)

 95 ×110.88
Fixed base Index number of 1970 = = 105.34
100

8 Base Shifting, Splicing and Deflating Index Numbers:

Base Shifting : In the series of Index numbers, if the base year is old, it becomes necessary to
change the index numbers to the recent base. The process is known as base shifting.

Illustration 12 : The following table gives fixed base Index numbers with 1949 as the base year.
Convert them into index numbers with 1955 as base year.

Year : 1949 1950 1951 1952 1953 1954 1955 1956 1957
Index Number : 100 120 150 160 180 200 200 210 240

Ans. : Base year is 1955 therefore, Index number of 1955 = 100

Year Index number Index numbers with 1955 as the base

year instead of 1949 as base year

100
1949 100 ×100 = 50
200

120
1950 120 ×100 = 60
200

150
1951 150 ×100 = 75
200

160
1952 160 ×100 = 80
200

180
1953 180 ×100 = 90
200

200
1954 200 ×100 = 100
200

200
1955 200 ×100 = 100
200

INDEX NUMBER 421

 210
1956 210 ×100 = 105
200

240
1957 240 ×100 = 120
200
Splicing of Index Numbers: Suppose we havea series of index numbers with one year as base
year and we have constructed a new series of index numbers with a recent year as base year.
As both the series have different base years comparison cannot be directly made.To make them
comparable a continuous series from the given two series is obtained, having a commonb ase.The
process of connecting the two series with a common base is known as splicing. The splicing
can be done if the two series have a t least one overlapping period.

Illustration 13 : The following table gives two series of index numbers with 1992 as base year
and 1997 as base year. Splice them to a series with base year 1997.

Year Index No. Index.No.

(1992=100) (1997=100)
1992 100
1993 120
1994 125
1995 140
1996 145
1997 150 100
1998 110
1999 120
2000 125
2001 130

Ans.

Year Index No. Index.No. Spliced Index No.

(1992=100) (1997=100) (1997=100)

100
1992 100 ×100 = 66.67
150

100
1993 120 ×120 = 80
150

422 STATISTICS (CPT)

 100
1994 125 ×125 = 83.33
150

100
1995 140 ×140 = 93.33
150

100
1996 145 ×145 = 96.67
150
1997 150 100 100
1998 110 110
1999 120 120
2000 125 125
2001 130 130

Deflating the series : Due to inflation the purchasing power of money diminishes. That means
we can purchase less for the same amount of money. Deflating is a technique of adjusting a
given series by eliminating the effect of change of prices. Index numbers help us in deflating a
time series.

Illustration 14 : The following table gives monthly salary of a government servant for different
years. Using cost of living index numbers, calculate his real salary in different years.

Year Cost of Montly

Living I.N. Salary

1991 100 8000

1992 110 8500

1993 120 9000

1994 125 9500

1995 150 11000

1996 160 11500

1997 165 12000

1998 180 12500

1999 185 14000

2000 190 14500

Ans.

INDEX NUMBER 423

 Year Cost of Montly Real Salary
Living I.N. Salary
1991 100 8000 8000

8500
1992 110 8500 ×100 = 7727
110

9000
1993 120 9000 ×100 = 7500
120

9500
1994 125 9500 ×100 = 7600
125

11,000
1995 150 11,000 ×100 = 7333
150

11,500
1996 160 11,500 ×100 = 7188
160

12,000
1997 165 12,000 ×100 = 7273
165

12,500
1998 180 12,500 ×100 = 6944
180

14,000
1999 185 14,000 ×100 = 7568
185

14,500
2000 190 14,500 ×100 = 7632
190

9. Consumer’s Price Index Number:

OR

Cost of Living Index Number :

The whole-sale price index number measures the changes in the whole-sale price of different
commodities. These changes, do not give an idea about their effect on the cost of living of
different groups of people. Different groups of people consume different types of commodities
and even the same group of persons does not consume the commodities in the same proportion.
Hence in order to study the effect of changes in the prices of different commodities on a particular

424 STATISTICS (CPT)

 group the cost of Living Index number for that group is constructed.

An index number of the cost of living is the ratio that the current cost of a fixed collection of
goods and services bears to the cost of the same collection of goods and services during the base
period. These index numbers are computed to study the average increase in the expenditure for
maintaining the living standards due to increase in prices in the current year as compared to
the base year. The consumption pattern of different classes of people varies widely. The cost of
living index number is generally prepared for working class people. These index numbers are
used to decide dearness allowances of working class people. The changing purchasing power
of the currency or real income can be measured by these index numbers.

The scope of index number is to be clearly defined. If it is to be used for working class people, a
family budget enquiry is conducted. Some families of working class people, are selected at
random and their consumption pattern is ascertained by knowing the quantity of commodities
consumed by them. The items are grouped under five heads:

(i) Food (ii) Clothing (iii) Fuel and Lighting (iv) House rent (v) Miscellaneous.

Each group is given weightage according to the percentage expenditure of the group compared
to the total expenditure. Each of the groups is further divided into subgroups and weightages
are assigned accordingly, e.g., the group of food articles is divided into wheat, rice, pulses, oil,
ghee, etc.

The retail prices of the articles are collected. Price! quotations should be obtained from the
shops from which these families purchase their goods or articles. These prices vary from place
to place, so their average is taken. The prices of the current period are compared with those of
the base period and price relatives (I) are calculated. The index number of the group is separately

 IW
calculated by the formula
W .
Again from the weightage and the index number of each of the groups the overall index number
is computed by the same formula and this index number is known as the cost of living index
number.

Utility of consumer’s price index number :

The consumer’s price index number is very useful in the various economic activities:

(1) The cost of living index number for each income group exposes the economic conditions of
the group with the help of which the wages, dearness allowance, bonus, etc. can be fixed.

(2) The changing purchasing power of the currency can be measured with the help of this

INDEX NUMBER 425

 index number. The real income of the working class people decreases with inflation.
Therefore, it is necessary to protect them against the inflationary trend. This purpose can
be served by using !his index number.

(3) At Government level, these index numbers are used for wage policy, price policy, rate
control, taxation and general economic policies.

(4) The markets for particular goods and services can be analysed by using these index numbers.

However the following limitationsof the cost of living index number should be noted.

Limitations:

(1) The commodities used by the people vary from time to time. The new commodities should
be introduced and the outdated commodities should be omitted.

(2) The retail prices vary from place to place,

(3) The base year should be changed at short interval of time.

Illustration 15 : The following table gives the details of the expenditure on food articles of
working class families. Prepare index number of food articiles by using the family budget method,
from the given data.

Commodity Consumption Price Price

in 1939 in 1939 in 1945

Wheat 2 2.50 12.50

Rice 3 3.00 18.00

Bajri 8 0.75 7.50

Pulses 2 1.00 15.00

Sugar 1 4.00 20.00

The prices of clothing, house rent, fuel and miscellaneous expenses in 1945 were 8, 3, 5 and 7
times of the prices in 1939, and the working class families spent resectively 15%, 10%, 5% and
10% of their total expenses on the above items. Find the cost of living index number.

Ans : First, let us find out the index number on food items by using family budget method.

426 STATISTICS (CPT)

 P1
Commodity Consumption Price Price I  100 W = p0q0 IW
P0

in 1939 in 1939 in 1945

Wheat 2 2.50 12.50 500 5 2500

Rice 3 3.00 18.00 600 9 5400

Bajri 8 0.75 7.50 1000 6 6000

Pulses 2 1.00 15.00 1500 2 3000

Sugar 1 4.00 20.00 500 4 2000

26 18900

Index number of food articles

 IW 18900
= = = 727 (approx.)
W 26

For the calculation of the cost of living index number price relatives (I) for clothing, rent, fuel
and miscelleneous will be 800, 300, 500 and 700 respectively as it is given that prices of 1945 arc
8, 3, 5 and 7 times of the prices of 1939. The expenses on the above items are 15%, 10%, 5% and
10% respectively. Their sum is 40%. Therefore expenses on food articles is remaining 60%, and
its price relative is 727. Hence the cost of living index number can be obtained as follows :

Commodity Index I Weight W IW

Clothing 800 15 12000

House rent 300 10 3000

Fuel 500 5 2500

Misc. 700 10 7000

Food articles 727 60 43620

 W = 100  IW = 68120
 IW 68120
Cost of living index number = = = 681.20
W 100

Illustration 16 : The percentage increase in the prices of five commodities are 50%,80%, 110%,
160% and 200% and their relative importance are in the proportion 10:6:4:3:2.
Find the index number.

INDEX NUMBER 427

 Ans. : The percentage increase in the prices are given, so the price relatives (I) can be obtained
by adding 100 in each of them. The relative importance of the commodities are their weights.
Therefore index number can be computed as follows :
Percentage Price
Incrase Relatives Weight
in price I W IW
50 150 10 1500
80 180 6 1080
110 210 4 840
160 260 3 780
200 300 2 600
25 4800

 IW 4800
Index number = = = 192
W 25

Illustration 17 : Construct an index number from the following data :

Commodity Weight Price (in `)

1950 1966

A 30 4 14

B 15 7 21

C 8 5 12.5

D 22 10 20

Ans. Here the prices of the current year and the base year are given and hence price relatives I
can be obtained. From the weights and price relative the index number can be computed as
follows:

428 STATISTICS (CPT)

 Commodity Weight Price
P1
W 1950 1966 I= ×100 IW
P0
P0 P1

A 30 4 14 350 10500

B 15 7 21 300 4500

C 8 5 12.5 250 2000

D 22 10 20 200 4400

75 21400

 IW 21400
Ans. : Index number = = = 285.33
W 75

Illustration 18 : Calcualte index number by aggregate expenditure method family budget

method from the following data :

Commodity Consumption in Price Price

1960 1960 1970

Wheat 15 12 24

Rice 10 18 45

Bajara 5 8 20

Pulses 3 12 36

Ans. :

Commodity Consumption Price Price relative

P1
in 1960 in 1960 in 1970 p1q0 p0q0 I= × 100 IW
P0

q0 p0 p1 w

Wheat 15 12 24 360 180 200 36000

Rice 10 18 45 450 180 250 45000

Bajra 5 8 20 100 40 250 10000

Pulses 3 12 36 108 36 300 10800

1018 436 101800

INDEX NUMBER 429

 Index number by aggregate expenditure method

p q
1 0
 100
=
p q
0 0

1018
= ×100 = 233.49
436
Index number by family budget method

 IW 101800
= = = 233.49
W 436

* * *

430 STATISTICS (CPT)

 CLASS WORK + HOME WORK - 1

1. Index numbers are also known as

(a) economic barometers (b) signs and guide posts
(c) both (a) and (b) (d) neither (a) nor (b)
2. Index number is a
(a) measure of relative change (b) a special type of an average
(c) a percentage relative (d) all the above
3. Index numbers are expressed
(a) in percentages (b) in ratios
(c) in terms of absolute value (d) all the above
4. Index numbers help
(a) in framing of economic policies (b) In assessing the purchasing power of
money.
(c) for adjusting national income (d) all the above
5. Index numbers reveal the state of
(a) inflation (b) deflation
(c) both (a) and (b) (d) neither (a)nor (b)
6. The error(s) involved in the construction of index numbers is/are
(a) error of sampling (b) formula error
(c) error in collection of data (d) all the above
7. Element of subjectivity is involved in index numbers due to
(a) choice of base year (b) selection of weights
(c) choice of commodities (d) all the above
8. Most commonly used index number is
(a) Diffusion index number (b) price index number
(c) value index number (d) none of the above
9. The index number of the base year is
(a) 1 (b) 100
(c) 0 (d) none of them

INDEX NUMBER 431

10. A fixed year is taken as the base year in the chain base method.
(a) Yes (b) No
(c) May be (d) none of them
11. The cost of living index number for the working class families can not be applied to the middle
class families.
(a) Yes (b) No
(c) May be (d) none of them
12. The price of a commodity in the current year has increased by 250 per cent compared to that in
the base year. Therefore the index number is 250.
(a) Yes (b) No
(c) May be (d) none of them
13. Each commodity is given equal importance in the construction of index number.
(a) Yes (b) No
(c) May be (d) none of them
14. If the price of the current year is eight times to that of the base year, the index number is
(a) 8 (b) 100
(c) 800 (d) none of them
15. In the ........ method the preceding year is taken as the base year.
(a) Fixed base (b) chain base
(c) Fisher’s (d) none of them
16. Consumer price index number is constructed for
(a) a well defined section of people (b) all people
(c) factory workers only (d) all the above
17. Base period for an index number should be
(a) a year only (b) a normal period
(c) a period at distant past (d) none of the above.
18. The most appropriate average for index number is
(a) arithmetic mean (b) geometric mean
(c) harmonic mean (d) none of the above
19. Most frequently used index number formulae are
(a) weighted formulae (b) unweighted formulae
(c) fixed weight formulae (d) none of the above.

432 STATISTICS (CPT)

20. Unweighted price index formula is
(a) most frequently used (b) seldom used
(c) the best (d) all the above.
21. Laspeyre’s index formula uses the weights of the
(a) base year (b) current year
(c) average of the weights of a (d) none of the above.
number of years.
22. Laspeyre’s index number was given in the year
(a) 1901 (b) 1871
(c) 1874 (d) none of the above
23. Laspeyre’s index number is also known as :
(a) fixed base index (b) given year method index
(c) base year method index (d) none of the above.
24. Paasche’s index number formula uses the weights of the
(a) the base period (b) the current period
(c) to any arbitrary chosen period (d) none of the above.
25. Paasche was
(a) an English mathematician (b) a French economist
(c) a German statistician (d) none of the above
26. Paasche’s index number was given in the year
(a) 1871 (b) 1901
(c) 1874 (d) 1918
27. The geometric mean of Laspeyre’s and Paasche’s price indices is also known as:
(a) Fisher’s price index (b) Kelly’s price index
(c) Drobish-Bowely price index (d) Walsh price index
28. Geometric cross formula for index number is known as :
(a) Walsh ideal formula (b) Fisher’s ideal formula
(c) Bowley’s standard formula (d) none of the above.
29. Fisher named the geometric cross formula as an ideal index formula in the year.
(a) 1901 (b) 1910
(c) 1920 (d) 1950

INDEX NUMBER 433

30. The price of five commodities have increased by 100%, 200%, 300%, 400 % and 500% in the
current year compared to those in the base year and their relative importance are in the proportion
5 : 4 : 3 : 2 : 1. The index number of prices is
(a) 100 (b) 133.33
(c) 333.33 (d) none of them

31. From the following data, Laspeyre’s index number is

Base year Current year
Commodity
Price Quantity Price Quantity
A 6 50 10 50
B 2 100 2 200
C 4 200 6 100
(a) 100 (b) 133.33
(c) 333.33 (d) none of them
32. From the following data, Fisher’s index number is
Base year Current year
Commodity
Price Quantity Price Quantity
A 6 50 10 50
B 2 100 2 200
C 4 200 6 100
(a) 100 (b) 133.33
(c) 333.33 (d) none of them
33. From the following data, Paasche’s index number is
Base year Current year
Commodity
Price Quantity Price Quantity
A 6 50 10 50
B 2 100 2 200
C 4 200 6 100
(a) 100 (b) 133.33
(c) 333.33 (d) none of them
34. The index number of base year is 100.
(a) Yes (b) No
(c) May be (d) none of them

434 STATISTICS (CPT)

35. In usual notations, P q 1 0  500,  P0 q0  425,  P1q1  540,  P0q1  480 . the Fisher’s index
number is
(a) 100 (b) 115
(c) 120 (d) none of them
36. For the data given below, find x if the ratio between Laspeyre’s (L) and Paasche’s (P) index numbers
is 28 : 27
Commodities Commodities
A B A B
p0 1 1 p1 2 x
q0 10 5 q1 5 2
(a) 5 (b) 6
(c) 4 (d) none of them
37. The price index as the arithmetic mean of Laspeyre’s and Paasche’s indices was expounded by
(a) Kelly (b) Irving Fisher
(c) Drobish and Bowely (d) Walsh
38. Marshall and Edgeworth price index number formula utilizes the weights as
(a) quantities of the base year (b) quantities of the current year.
(c) combined quantities of base and (d) any of the above
given year
39. The weighted price relatives with selective weights can be reduced to
(a) Laspeyre’s formula (b) Paasche’s formula
(c) both (a) and (b) (d) neither (a) nor (b).
40. Sampling error in respect of index numbers can be reduced by
(a) taking a random sample of items. (b) including large number of items.
(c) both (a) and (b) (d) neither (a) nor (b)
41. If the index number is independent of the units of measurements, then it satisfies
(a) times reversal test (b) factor reversal test
(c) unit test (d) all the above
42. Factor reversal test was given by
(a) Walsh (b) A.L.Bowely
(c) John I. Griffin (d) Irving Fisher

INDEX NUMBER 435

43. Circular test for price indices is satisfied by the formula :
(a) based on geometric mean of price relatives
(b) obtained by Kelly’s fixed weight method.
(c) both (a) and (b)
(d) neither (a) nor (b)
44. Fisher’s ideal formula does not satisfy:
(a) time reversal test (b) circular test
(c) factor reversal test (d) unit test
45. Year-to-year indices in the chain-base method are called :
(a) Chain indices (b) link relatives
(c) fixed base indices (d) all the above
46. Indices calculated by the chain-base method are almost free from:
(a) homogeneity error (b) seasonal variations
(c) rigidity of weights (d) all the above
47. Combining of two index number series having different base periods into one series with common
base period is known as :
(a) Splicing (b) base shifting
(c) both (a) and (b) (d) neither (a) nor (b)
48. If the old series is connected with the new series of index numbers, it is known as:
(a) base sifting (b) backward splicing
(c) forward splicing (d) none of the above
49. If the new series is connected with the old series, it is known as :
(a) base shifting (b) backward splicing
(c) forward splicing (d) all the above
50. The following are the index number of prices on base 1990.
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998
I. N. 100 105 120 150 200 250 300 320 350
the index number of prices on base 1994 are
(a) 66.67, 70, 72, 76.67, 80, 100, 106.67, 110, 113.33
(b) 50, 52.5, 60, 75, 100, 125, 150, 160, 175
(c) 50, 52.5, 60, 75, 200, 125, 150, 160, 175
(d) none of them
51. From the following data, the index numbers taking 1995 as the base year are
Year I. N. I. N.

436 STATISTICS (CPT)

 (Base 1990) Base 1995
1990 100
1991 120
1992 125
1993 140
1994 150
1995 160 100
1996 110
1997 115
1998 120
1999 128
2000 130
(a) 62.5, 75, 78.12, 87.5, 93.75, 100, 110, 115, 120, 128, 130
(b) 100, 120, 125, 140, 150, 160, 110, 115, 120, 128, 130
(c) 100, 120, 125, 140, 150, 100, 110, 115, 120, 128, 130
(d) none of them
52. Fisher’s ideal index number satisfies circular test.
(a) Yes (b) No
(c) May be (d) none of them
53. An index is at 100 in 1991. It rises 5% in 1992, falls 6% in 1993, falls 5% in 1994, rises 4% in 1995
and 7% in 1996. The index numbers for all these years with 1991 as base are
(a) 100,105,94,105,95,107 (b) 100,105,94,105,107,95
(c) 100,105,94,107,95,94 (d) 100,105,94,95,104,107
54. The cost of living index number from the following data :
Group Weights Group/Commodity
Commodities W Index Number I
Food 71 370
Clothing 3 423
Fuel etc. 9 469
House rent 7 110
Miscellaneous 10 279
(a) 353.2 (b) 300

INDEX NUMBER 437

 (c) 100 (d) none of them

55. Index number is unit free.

(a) False (b) True
(c) may be (d) none of them
56. If Laspeyre’s price index is 324 and Fisher’s ideal index is 216, then Paasche’s price index is
(a) 234 (b) 180
(c) 216 (d) none of the above
57. Deflation of index numbers is meant for calculating
(a) real wages (b) money income index
(c) real income index (d) all the above.
58. If a family spends on food, housing and clothing in the rate of 5:3:2 and experiences the rise in
prices of these heads by 40, 30 and 20 per cent respectively, the family budget will be increased by
(a) 33% (b) 40%
(c) 37% (d) none of the above
59. If Laspeyre’s price index is 324 and Paasche’s price index 144, then Fisher’s ideal index is
(a) 234 (b) 180
(c) 216 (d) none of the above
60. If the consumer price index for 1994 is 800, then the purchasing power of a rupee is
(a) 0.125 paise (b) 12.5 paise
(c) 8 paise (d) none of the above
61. The consumer price index numbers for 1981 and 1982 to the base 1974 are 320 and 400 respectively.
The consumer price index for 1981 to the base 1982 is
(a) 125 (b) 80
(c) 128 (d) none of the above
62. The index number for 1985 to the base 1980 is 125 and for 1980 to the base 1985 is 80. The given
indices satisfy
(a) time reversal test (b) factor reversal test
(c) circular test (d) all the above
63. The price relatives for three commodities are 125, 120 and 130 with their respective weights 5, w
and 8. If the price index for the set is 125.25, the value of w is
(a) 6 (b) –7
(c) 7 (d) none of the above

438 STATISTICS (CPT)

64. If the group indices are 80, 120 and 125 and their respective group weights are 60, 20 and 20, the
consumer price index is
(a) 108.33 (b) 97.00
(c) 98.49 (d) none of the above.
65. An appropriate method for working out consumer price index is
(a) weighted aggregate expenditure (b) family budget method
method.
(c) Price relative method. (d) none of the above.
66. For consumer price index, price quotations are collected from :
(a) retailers (b) wholesale dealers
(c) fair price shops (d) government depots
67. The consumer price index in 1990 increases by 80% as compared to the base 1980. A person in
1980 getting ` 60,000 per annum should now get :
(a) ` 1,08,000 per annum (b) ` 72,000 per annum
(c) ` 54,000 per annum (d) none of the above.

* * *

INDEX NUMBER 439

 ANSWER KEYS

440 STATISTICS (CPT)

 HOME WORK - 2

1. Chain index is equal to

(a)

(b)

(c)

(d)

2. The test of shifting the base is called

(a) Unit Test. (b) Time Reversal Test.

(c) Circular Test. (d) None of these.

3. An index time series is a list of _______ nos. for two or more periods of time.
(a) Index (b) Absolute (c) Relative (d) Sample
4. P01 is the index for time
(a) 1 on 0 (b) 0 on 1 (c) 1 on 1 (d) 0 on 0
5. 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.

6. If the price of all commodities in a place have increased 125 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 of the above

7. If now the prices of all the commodities in a place have been decreased by 85% over the base
period prices, then the index number of prices for the place is now (index number of prices of

INDEX NUMBER 441

 base period = 100)
(a) 100 (b) 135 (c) 65
(d) None of these
8. 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 is now
(a) 125 (b) 150
(c) 225 (d) None of these
9. Simple Aggregative Method is used for computing a
(a) Relative index. (b) Price index.
(c) Value index. (d) None of these.
10. The ______ is satisfied when Pab × Pbc × Pca = 1.
(a) Time reversal test (b) Factor reversal test
(c) Circular test (d) Unit test
11. ______ is an extension of time reversal test.
(a) Factor reversal test (b) Circular test
(c) Unit test (d) None of above
12. Time reversal test is satisfied when
(a) P01 × P10 = 0 (b) P01×P10 = 1
(c) P01 × P10 <1 (d) P01 ×P10 >1
13. The total sum of the values of a given year divided by the sum of the values of the base year is
a
(a) Price index. (b) Quantity index.
(c) Value index. (d) None of these.
14. Fisher’s ideal index is
(a) Arithmetic mean of Laspeyre’s and Paasche’s index.
(b) Median of Laspeyre’s and Paasche’s index.
(c) Geometric mean of Laspeyre’s and Paasche’s index.
(d) None of these
15. Factor reversal test is satisfied by
(a) Laspeyre’s index. (b) Paasche’s index.
(c) Fisher’s ideal index. (d) None of these.

442 STATISTICS (CPT)

16. Laspeyre’s index is based on

(a) Base year Quantities. (b) Current year Quantities.

(c) Average of current year and base year(d) None of these.

17. P10 is the index for time

(a) 1 on 0 (b) 0 on 1 (c) 1 on 1 (d) 0 on 0
18. Laspeyre’s and Pasche’s method satisfy time reversal test
(a) True (b) False (c) Both (d) None of these

19. The index no. is a special type of G.M.

(a) True (b) False

(c) Both (d) None of these

20. The no. of test of adequacy is __________________

(a) 2 (b) 5 (c) 3 (d) 4

21. If with a rise of 10% in prices the salaries are increased by 20%, the real salary increase is by

(a) 10% (b) More than 10%

(c) 20% (d) Less than 10%

22. P10 is the index for time

(a) 1 on 0 (b) 0 on 1 (c) 1 on 1 (d) 0 on 0
23. The index no. is not a special type of average

(a) False (b) True

(c) Both (d) None of these

24. Fisher’s ideal formula does not satisfy _______ test.

(a) Unit test (b) Circular test

(c) Time reversal test (d) None of these

25. Fisher’s ideal idex no. is equal to
(a) Laspeyse’s index x Pasche’s is Index

(b)

(c) (d) None of these

INDEX NUMBER 443

26. Fisher’s Ideal formula does not satisfy_________ test

(a) Circular test (b) Unit test

(c) Time Reversal test (d) None of these

27. The price level of a country in a certain year has increased 20% over the base period. The Index
number is _____________

(a) 20 (b) 120

(c) 220 (d) None of these

28. In a circular test the condition must be satisfied

(a) P01 x P12 x P20 = 1 (b) P02 x P10 x P20 = 1

(c) P10 x P20 x P21 = 1 (d) None of these

29. Each and every index number is independent of Unit of measurement.

(a) True (b) False

(c) Both (a) & (b) (d) None of these

30. For factor reversal test: = True Value Ratio (T.V.R.) This is

(a) False (b) True

(c) Both (a) & (b) (d) None of these

31. Factor Reversal test is satisfied by

(a) Fisher’s Ideal Index Number (b) Laspeyre’s Index Number

(c) Paasche’s Index Number (d) All of the above

32. During a certain period, the cost of living index number goes up from 110 to 200 and the salary
of the worker is also raised from Rs. 3,250 to Rs. 5,000. Does the worker really gain?
(a) No (b) Yes

(c) Cannot determine (d) None of these

33. During a certain period, the cost of living index number goes up from 110 to 200 and the salary
of the worker is also raised from Rs. 3,250 to Rs. 5,000. Find the value of salary in real terms?
(a) Rs. 5,800 (b) Rs. 5,909
(c) Rs. 5,900 (d) None of these
34. When the prices or quantities of all the goods are charging in the same ratio then the Laspeyre’s
and Paasche’s Index Number will be

444 STATISTICS (CPT)

 (a) Equal (b) Unequal
(c) Either (a) or (b) (d) None of these
35. Between 1990 and 2000, the price of a commodity increased by 60% while the production
decreased by 30%. By what percentage did the value index of production of commodity change
in 2000 with respect to its value 1990.
(a) 10% (b) 15%
(c) 12% (d) None of these
36. The consumer price index over a certain period increased from 120 to 215 and the wages of
worker increased from Rs. 1,680 to Rs. 3000. What is the loss of the worker?
(a) 5.58 (b) 6.58
(c) 7.58 (d) None of these
37. The consumer price index for a group of workers was 250 in 1994 with 1980 as the base.
Compute the purchasing power of a rupee in 1994 Compared to 1980.
(a) 0.40 (b) 0.50
(c) 0.60 (d) None of these
38. When the cost of living increases, the standard of living improves. This is
(a) True (b) False
(c) Either (a) or (b) (d) None of these
39. There are ……………. Tests for Index Number
(a) Four (b) Three
(c) Five (d) None of these
40. Laspeyre’s & Paasche’s Index Number satisfy the time reversal test.
(a) True (b) False
(c) Either (a) or (b) (d) None of these

* * *

INDEX NUMBER 445

 ANSWER KEYS
1 (c) 11 (b) 21 (d) 31 (a)

2 (c) 12 (b) 22 (b) 32 (a)

3 (a) 13 (c) 23 (a) 33 (b)

4 (a) 14 (c) 24 (b) 34 (a)

5 (a) 15 (a) 25 (b) 35 (c)

6 (c) 16 (a) 26 (a) 36 (a)

7 (d) 17 (b) 27 (b) 37 (a)

8 (c) 18 (b) 28 (a) 38 (b)

9 (b) 19 (b) 29 (a) 39 (a)

10 (c) 20 (d) 30 (b) 40 (b)

* * *

446 STATISTICS (CPT)