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Foundation
Quantitative Aptitude

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 CHAPTER

18 Index Number

INDEX NUMBER
An Index Number is a statistical measure that is used to track and represent changes in a
variable or a collection of related variables over time, space, or other factors. It provides a
way to summarize and compare data to understand the overall trend or performance.
In the context of financial markets, Indices play a crucial role in measuring the performance
of stock markets. For example, the Bombay Stock Exchange (BSE) and the National Stock
Exchange (NSE) in India provide indices such as the Sensex and Nifty, respectively. These
indices represent the collective performance of a specific set of stocks listed on the respective
exchanges.
Market Summary > NIFTY 50 Market Summary > BSE SENSEX

Definition
An Index number is a ratio of two or more time periods involved, one of which is the base
time period. The value at the base time period serves as the standard point of comparison.

Types of Index Numbers

Types Significance
Shows Movements in the price levels between the base year and
other periods.
Price Index Numbers
Increase in Price Level is called Inflation whereas decrease refers to
Deflation.
Quantity I n d e x Shows the movement in Quantity levels between two periods.
Numbers Used in Calculating Industrial Production Indices etc
Shows the movement in value levels between two periods.
Value Index Numbers Value = Price x Quantity
It is used for computing Growth rate of an Economy etc.

Index Time Series: An Index Time Series is a list of index numbers for two or more periods
of time, where each Index number employs the same base year.
‰ Issues involved in Construction of Index Numbers:
I. Selection of Data: Choosing the right data is crucial. For instance, if you’re making
an index to measure the cost of living, you should focus on prices that directly affect
living expenses while excluding prices for things like machinery.
Base Period: The base period serves as your reference point. It should be a stable
II. 
time, not influenced by unusual events like wars. A relatively recent base period is
often better, and there are different methods for choosing it.
Selection of Weights: Every variable in your index needs a weight based on its
III. 
importance for your specific purpose. For example, if you’re calculating a cost of
living index, essentials like cereals might weigh more than non-essentials like sugar.
IV. Use of Averages: Averages are vital. The type of average you pick, be it geometric or
arithmetic, depends on the nature of your index.
Choice of Variables: Deciding what variables to use, like price or quantity, is essential.
V. 
For a price index, you need to choose between wholesale or retail prices and decide
on the relevant time frame for prices.
Selection of Formula: The formula you use is critical. Different formulas applied to
VI. 
the same data can yield different results. So, it’s important to choose the right one
for your index.

‰ CONSTRUCTION OF INDEX NUMBERS:

Notation: If we have to take the prices of 3 different commodity for nth period then it
can be written as Pn(1), Pn(2), Pn(3)
While if we take price corresponding to base period for 3 different commodity, it will
be written as P0(1), P0(2), P0(3)
Now let’s say we have commodity ‘j’ where j is variable and varying from 1 to k then:
k
Summation for all prices of nth period can be written as ∑ Pn ( j) or ∑ Pn ( j) .
j =1

RELATIVES
1. Price relative: As we are discussing the prices, let’s talk about relative prices which is
called as price relative. Price relative can be defined as the ratio of Price of a single
commodity in one time period to the price of base period or reference period.
Pn
It is written as: Price relative =
P0
If we have to express it in form of percentage, it can be multiplied by 100 :

2 Quantitative Aptitude PW
 Pn
Price relative
= × 100
P0

E.g.: Let’s consider the price of a particular product, a smartphone, in two time periods:
the base period (2010) and the current period (2021). In 2010. the smartphone
was priced at `20,000. while in 2021, it was priced at `48,000. To calculate the
price relative, we can use the formula:
Pr ice in 2021 48, 000
Price Relative
⇒= = × 100 × 100 = 2.4 x 100 = 240 %
Pr ice in 2010 20, 000
This indicates that the price of the smartphone has increased by 240 % from the base
period to the current period in terms of Indian Rupees.
As we discussed for Price relative, the same discussion can happen in terms of quantity,
volume of consumption etc.
Then, in that case relatives will be:
2. Quantity Relative: The quantity relative compares the quantity of a particular commodity
in one time period to the quantity in a base or reference period.
Qn
Quantity Relative =
Q0
3. Value relative : The value relative considers the value of a commodity by multiplying the
price and quantity relatives together.
Vn Pn Qn Pn Qn
Value Relative = = × =
V0 P0 Q0 P0 Q0

Link Relative: When we take ratio of successive prices or quantities, then it is called the
P P2 P3 Pn
link relatives i.e., 1 , , ,
P0 P1 P2 Pn − 1

Commodity Milk (per litre) Link Relative

50
2005 50 × 100 =
100
50

55
2010 55 × 100 =
110
50

60
2015 60 × 100 =
109.09
55

2020 70 70
× 100 =
116.67
60
Chain Relative: When the ratio is taken in respect to base price then it is called the chain
P P P P
relatives i.e., 1 , 2 , 3 , n
P0 P0 P0 P0

Index Number 3
 Commodity Milk (per litre) Link Relative

50
2005 50 × 100 =
100
50

55
2010 55 × 100 =
110
50

60
2015 60 × 100 =
120
50

2020 70 70
× 100 =
140
50

Methods for Constructing

Index Numbers

Simple Weighted

Aggregative Relative Aggregative Relative

Let’s start our discussion by understanding methods:

SIMPLE AGGREGATIVE

In this method of computing a price index, we express the total of commodity prices in a
given year as a percentage of total commodity price in the base year.

Simple Aggregative price index

=
∑ Pn × 100
∑ P0
where, ∑ Pn is the sum of all commodity prices in the current year and ∑ P0 is the sum of
all commodity prices in the base year.

Example of Simple Aggregate

Commodity 2010 2015 2020

Milk (per litre) 50 60 70
Atta (per kg) 10 12 15
Banana (dozen) 30 45 50
Aggregate 90 117 135
Index 100 130 150

4 Quantitative Aptitude PW
 117
Simple Aggregative Index for 2015 over 2010 = × 100 = 130 and for 2020 over
90
135
2010 = × 100 = 150
90

DEMERITS OF ABOVE METHOD

‰ It shows that the first commodity exerts greater influence than the other two because
the price of the first commodity is higher than that of the other two.
‰ Further, if units are changed then the Index numbers will also change.

SIMPLE RELATIVE OR SIMPLE AVERAGE

If we change the actual price for each variable into percentage of the base period. These
percentages are called relatives because they are relative to the value for the base period and
the index number formed is simple relative.
E.g.:
Commodity 2010 (P0) 2015 (P1) 2020 (P2)
Milk (per litre) 50 60 70
Atta (per kg) 10 12 15
Potato (per kg) 20 30 30
will become
Commodity 2010 (P0) 2015 (P1) 2020 (P2)

50 60 70
Milk (per litre) × 100 =
100 × 100 =
120 × 100 =
140
50 50 50

10 12
Atta (per kg) × 100 =
100 × 100 =
120 150
10 10

20 30
Banana (dozen) × 100 =
100 × 100 =
150 150
20 20

Aggregate 300 390 440

Index 300 390 440
= 100 = 130 = 146.66
3 3 3

ADVANTAGE OF SIMPLE RELATIVE METHOD

‰ Index number computed from relatives will remain the same regardless of the units by
which the prices are quoted.

DISADVANTAGE OF SIMPLE RELATIVE METHOD

‰ This amounts to giving undue weight to a commodity which is used in a small quantity
because the relatives which have no regard to the absolute quantity will give weight more
than what is due from the quantity used.

Index Number 5
 WEIGHTED AGGREGATIVE INDEX
While calculating the index number we will take care of the number of quantities or portions
of the commodity.
E.g.:

Commodity Quantity for 2010 2010 (Price) Quantity for 2020 2020 (Price)

Milk (per litre) 2 litres 50 2.5 litres 70

Atta (per kg) 1.5 kg 10 1 kg 15

Banana (per dozen) 3 dozen 30 4 dozen 50

SOME OF THE IMPORTANT FORMULA TO CALCULATE IT ARE:

‰ Laspeyre’s Index =
number
∑ Pn Q0 × 100
∑ P0 Q0

‰ Paasche’s Index number

=
∑ Pn Qn × 100
∑ P0 Qn
‰ Marshall- Edgeworth Index
= number ∑ Pn (Q0 + Qn ) × 100
∑ P0 (Q0 + Qn )
‰ Fisher’s Index number = ∑ Pn Q0 × ∑ Pn Qn × 100
∑ P0 Q0 ∑ P0 Qn
∑ Pn Q0 + ∑ Pn Qn'
‰ Dorbish and Bowley’s
= Price Index
∑ P0 Q0 ∑ P0 Qn' × 100
2

WEIGHTED AVERAGE OF RELATIVE METHOD

To overcome the disadvantage of a simple average of relative method, we can use weighted
average of relative method.
Let’s understand with same example:
Commodity Quantity for 2010 2010 (Price) Quantity for 2020 (Price)
2020
Milk (per litre) 2 litres 50 2.5 litres 70
Atta (per kg) 1.5 kg 10 1 kg 15
Banana (dozen) 3 dozen 30 4 dozen 50

We can solve it as:

6 Quantitative Aptitude PW
 Commodity Quantity 2010 Quantity 2020 P0 Q0 P0 Qn PnQ0 Pn Qn
for 2010 (Price) for 2020 (Price)
(Q0) (P0) (Qn) (Pn)
Milk (per litre) 2 litres 50 2.5 litres 70 100 125 140 175

Atta (per kg) 1.5 kg 10 1 kg 15 15 10 22.5 15

Banana (dozen) 3 dozen 30 4 dozen 50 90 120 150 200

Then,
∑ Pn Q0 312.5
‰ Laspeyre’s Index number= × 100= × 100= 152.44
∑ P0 Q0 205
∑ Pn Qn 390
‰ Paasche’s Index number = × 100 = × 100 = 152.94
∑ P0 Qn 255

‰ Marshall- Edgeworth Index

= number
(
∑ Pn Q0 + Qn ) × 100
∑ P0 ( Q0 + Qn )

312.5 + 390
                  
= × 100 = 152.71
205 + 255

∑ Pn Q0 ∑ Pn Qn 390 312.5
‰ Fisher’s Index number r = × × 100 = × × 100 = 152.68
∑ P0 Q0 ∑ P0 Qn 255 205

Relationship between Fisher’s Index, Paasche’s Index number and Laspeyre’s Index:

Fisher’s
= Ideal Index Number Paasche index number × Laspeyre ' s index number

Relationship between Dorbish and Bowley’s Price Index, Paasche’s Index number and
Laspeyre’s Index:
Laspeyre ' s Pr ice index + Paasche ' s Pr ice Index
Dorbish and Bowley’s Price Index Number =
2
PRICE AND QUANTITY INDEX
Method Price Index Quantity Index
1. Simple Aggregate
∑ Pn ∑ Qn
∑ P0 ∑ Q0
2. Simple Average of Relative
∑ Pn ∑ Qn
∑ P0 ∑ Q0
n n

Index Number 7
 Method Price Index Quantity Index
3. Weighted Aggregate

(a) With base year weight

∑ Pn Q0 ∑ QnP0
(Laspeyre’s index) ∑ P0 Q0 ∑ Q0P0
(b) With current year weight (Paasche’s
index)
∑ Pn Qn ∑ QnPn
∑ P0 Qn ∑ Q0Pn
(c) Fisher’s Ideal
∑ Pn Q0 × ∑ Pn Qn ∑ QnP0 × ∑ QnPn
[Geometric mean of Laspeyre’s and
Paasche’s]
∑ P0 Q0 ∑ P0 Qn ∑ Q0P ∑ Q0Pn
4. Weighted Average of Relative P  Q 
W = Weights = Base Year or Current Year ∑  Pn W  ∑  Qn 
 0   0 
Price Weight
∑W ∑W

CHAIN INDEX NUMBERS

‰ So far we concentrated on a fixed base but it does not suit when conditions change quite
fast.
‰ Under this method the relatives of each year are first related to the preceding year called
the link relatives and then they are chained together by successive multiplication to form
a chain index.
Link Re lative of current year × Chain index of the previous year
Chain Index =
100

Let us understand from the below example:

Year Price of commodity Link relative Chain index

10
2010 10 × 100 =
100 100
10

12 120 × 100
2012 12 × 100 =
120 = 120
10 100

14 116.67 × 120
2014 14 × 100 =
116.67 = 140
12 100

15 107.14 × 140
2016 15 × 100 =
107.14 = 150
14 100

17 113.33 × 150
2018 17 × 100 =
113.33 170
15 100

8 Quantitative Aptitude PW
 Year Price of commodity Link relative Chain index

20 117.65 × 170
2020 20 × 100 =
117.65 = 200
17 100

22 200 × 110
2022 22 × 100 =
110 = 220
20 100

VALUE INDEX
∑ Vn ∑ Pn × Qn
We know, Value = Price × Quantity i.e.,
= × 100
∑ V0 ∑ P0 × Q0
E.g.: The Value Index for the following data:
Quantity (units) Prince in (`)
Commodity
1995 Q0 1999 Qn 1995 P0 1999 Pn
A 100 150 500 900
B 80 100 320 500
C 60 72 120 360
D 30 33 360 297
We have,
Quantity (units) Prince in (`)
Commodity
1995 Q0 1999 Qn 1995 P0 1999 Pn P0Q0 PnQn
A 100 150 500 900 50000 135000
B 80 100 320 500 25600 50000
C 60 72 120 360 7200 25920
D 30 33 360 297 10800 9801
93600 220721
We know, Value is Price multiplied by Quantity
∑ Vn ∑ Pn × Qn
Thus,
= × 100
∑ V0 ∑ P0 × Q0

220721
= × 100
= 235.813
93600

Current value
Deflating time series using Index: Deflated Value =
Price index of current year
E.g.: From the table, compute the real GNP.

Year Wholesale Price Index GNP at current Prices

1970 113.1 7499
1971 116.3 7935

Index Number 9
 Year Wholesale Price Index GNP at current Prices
1972 121.2 8657
1973 127.7 9323
Thus, we have
Year Wholesale Price Index GNP at current Prices GNP (Real)

7499
1970 113.1 7499 × 100 =
6630
113.1

7935
1971 116.3 7935 × 100 =
6823
116.3

8657
1972 121.2 8657 × 100 =
7143
121.5

9323
1973 127.7 9323 × 100 =
7300
127.7

SHIFTING AND SPLICING OF INDEX NUMBERS:

Shifting of Index number means that base period of the index has to be shifted:

Original Pr ice index

Shifted Price Index × 100
Pr ice Index of the year on which it has to be shifted

From the following Index numbers with 1980 = 100 Shift the Index numbers to 1990 as
the base:

Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
Original 100 104 106 108 110 112 115 117 125 131 140 147
Price
Index

Thus, on shifting the index number to 1990 as the base, we get

Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
Original
Price 100 104 106 108 110 112 115 117 125 131 140 147
Index
Shifting 100 104 75.7 76.4 78 .57 80 82.1 83.6 89. 28 93.5 100 105
Base 140 140
index × 100
(1990) × 100
= 71.4 =74.28

10 Quantitative Aptitude PW
SPLICING OF INDEX NUMBERS
The following represent two series of index numbers:
1. One series with 1990 as base which is discontinued with the year 1995.
2. The second series with 1995 as the base is started from the year 1995, the year in
which the old index is discontinued.
Year Old Price Index [1990 = 100] Revised Price Index [1995 = 100]
1990 100.00 —
1991 102.30 —
1992 105.30 —
1993 107.60 —
1994 111.90 —
1995 114.20 100.00
1996 — 102.50
1997 — 106.40
1998 — 108.30
1999 — 111.70
2000 — 117.80

LIMITATION OF INDEX NUMBER

1 As the index are constructed mostly from deliberate samples, chances of errors creeping
in cannot be always avoided.
2. Since index numbers are based on some selected items, they simply depict the broad
trend and not the real picture.
3. Since many methods are employed for constructing index numbers, the result gives
different values and this at time create confusion

USEFULNESS OF INDEX NUMBERS

1. Framing suitable policies in economics and business. They provide guidelines to make
decisions in measuring intelligence quotients, research etc.
2. They reveal trends and tendencies in making important conclusions in cyclical forces,
irregular forces etc.
3. They are important in forecasting future economic activity. They are used in times series
analysis to long term trends, seasonal variations and cyclical developments.
4. Index numbers are very useful in deflating i.e., they are used to adjust the original data
for price changes and thus transform nominal wages into real wages.

Index Number 11
 TEST OF ADEQUACY
1. Unit Test: This test requires that the formula should be independent of the unit in which
or for which prices and quantities are quoted. Except for the simple (weighted) aggregative
index all other formulae satisfy this test.
2. Time Reversal Test: It means if periods are reversed and indices are multiplied it should
result in unity. P01 X P10 = 1 where P01 is the index for time 1 on 0 and P10 is the index
for time 0 on 1. Laspeyre’s method and Paasche’s method do not satisfy this test, but
Fisher’s Ideal formula does.
Proof :
I. Laspeyre’s Index:

We know
= that, P01
∑
=
P1Q0
P10
∑ P0 Q1
∑ P0 Q0 ∑ P1Q1
Thus, P01 × P=
∑ P1Q0 × ∑ P0 Q1 ≠ 1
10
∑ P0 Q0 ∑ P1Q1
II. Paasche’s Index:

∑ P1Q1 ∑ P0 Q0
=
We know that, P01 = ,P10
∑ P0 Q1 ∑ P1Q0
∴P01 × P
=
∑ P1Q1 × ∑ P0 Q0 ≠ 1
10
∑ P0 Q1 ∑ P1Q0
III. Fisher’s Index:

We know,
= P01
∑ P1Q0 × ∑ P1=
Q1
,P ∑ P0 Q1 × ∑ P0 Q0
∑ P0 Q0 ∑ P0 Q1 10 ∑ P1Q1 ∑ P1Q0
∴P01 × P10 =
∑ P1Q0 × ∑ P1Q1 × ∑ P0 Q1 × ∑ P0 Q0 = 1
∑ P0 Q0 ∑ P0 Q1 ∑ P1Q1 ∑ P1Q0
3. Factor Reversal Test: This holds when the product of the price Index and the quantity
index should be equal to the corresponding value index, i.e. P01 × Q01 = V01
Proof:
(I) Paasche’s Index:
To check:
P01 * Q01 = V01
We know,

∑ P1Q1
       P01 =
∑ P0 Q1
       Q01 =
∑ Q1P1
∑ Q0P1
12 Quantitative Aptitude PW
        P0, × Q01
=
∑ P1Q1 × ∑ Q1P1 ≠ V01
∑ P0 Q1 ∑ Q0P1
Similarly, we can prove that Laspeyre’s Index number do not satisfy the Factor
Reversal test.
(II) Fisher’s Index:

We know,
= P0
∑ P1Q0 × ∑ P1Q1
∑ P0 Q0 ∑ P0 Q1
1

=Q01
∑ P1Q0 × ∑ P1Q1
∑ P0Q0 ∑ P0Q1
P01 × Q
=
∑ P1Q0 × ∑ P1Q1 × ∑ P1Q0 × ∑ P1Q1
01
∑ P0 Q0 ∑ P0 Q1 ∑ P0 Q0 ∑ P0 Q1
⇒ ∑ (P1Q1 )2 =
∑ P1Q1
∑ (P0 Q0 )2 ∑ P0 Q0
Fisher’s Index satisfies Factor Reversal test.
Since, Fisher’s Index number satisfies both the tests in (2) and (3), thus it is called
an Ideal Index number.
Fisher’s index is the Ideal Index Number.
4. Circular Test: It is concerned with the measurement of price changes over a period of
years, when it is desirable to shift the base. i.e., P01 × P12 × P20 = 1
It is satisfied by:
(I) Weighted aggregative with fixed weighted average.
(II) Simple geometric mean of price relatives.

Example 1. A series of numerical figures which show the relative position is called (ICAI)
(a) Index number (b) Relative number
(c) Absolute number (d) None of these
Sol. (a) An index number is a ratio of two or more time periods involved, one of which is
the base time period. The value at the base time period serves as the standard point of
comparison.
Hence, the correct option is (a).
Example 2. Index number for the base period is always taken as (ICAI)
(a) 200 (b) 50 (c) 1 (d) 100
Sol. (d) An Index Number is a statistical tool for determining the degree of changes in a set
of connected variables.
Let ∑P1 be the value of commodity in current period and ∑P0 be the value of commodity
in base period

Then.
= P
∑ P1 × 100
∑ P0
Index Number 13
 Base period = current period for determining the Index number in the base period.
∑P1 = ∑P0
⇒ P = 1 x 100 = 100
Hence. Index Number for the base period is always taken as hundred.
Hence, the correct option is (d).
Example 3. Price relative is equal to (ICAI)
Price in the given year × 100 Price in the base year × 100
(a) (b)
Price in the base year Price in the base year

(c) Price in the given year × 100 (d) Price in the base year × 100
Sol. (a) The percentage difference between the current year’s price and the base year’s price
is known as a price relative.
The approach uses the current-year price of each commodity as a percentage of the
base-year price.
P1
Price relative
= × 100
P0
Hence, the correct option is (a).
Example 4. ____________is an extension of the time reversal test. (ICAI)
(a) Factor Reversal test (b) Circular test
(c) Both (d) None of these
Sol. (b) The circular test is a statistical technique in which the index of the later period on
the earlier period is exactly the opposite of the index of the earlier period on the later
period, however this test is applicable when there are more than two periods involved.
Hence, the correct option is (b).
Example 5. Index numbers show ___________ changes rather than absolute amounts of change.
(a) Relative (b) Percentage (c) Both (d) None of these (ICAI)
Sol. (a) Instead of displaying exact quantities of change, index numbers are utilized to display
relative changes. This implies that index numbers calculate the difference between a
variable’s current value and its base value. The Consumer Price Index (CPI), for instance,
is used to track variations in the cost of products and services over time.
Hence, the correct option is (a).
Example 6. The ___________ makes index numbers time-reversible. (ICAI)
(a) A.M. (b) G.M. (c) H.M. (d) None of these
Sol. (b) This test determines if the procedure is time-reversible in both directions. Prof. Fisher
asserts that regardless of which of the two points of time is used as the base, the method
for computing an index number should provide the same ratio between one point of time
and the other.
In other words, if the base is inverted and the data for any two years are analysed using
the same methodology7, the two index numbers should be the reciprocals of one another.
P01 × P10 = 1

14 Quantitative Aptitude PW
 Hence, the correct option is (b).
Example 7. __________ play a very important part in the construction of index numbers.
(a) Weights (b) Classes (c) Estimations (d) None of these(ICAI)
Sol. (a) In conclusion, weights are very important when creating index numbers.
Each item’s weight is allocated to indicate its relative importance, maintain correctness,
allow for comparison, and aid in classifying the objects.
It is crucial for each of the factors in the composite index to have a unique impact on
the index. As a result, the importance should extend to those factors that are crucial to
an index’s goal.
Hence, the correct option is (a).
Example 8. Index number is equal to (ICAI)
(a) Sum of price relatives (b) Average of the price relative
(c) Product of Price Relative (d) None of these
Sol. (b) The Index number is determined by dividing the total of the actual prices for the base
year by the total of the prices for the year for which the index number is to be obtained.
In terms of percentages, Index numbers are expressed.
The base period is the time frame between the two that will be used for comparison.
The base period’s index number is always set at 100.

Price in the given year

Price relative
= × 100
Price in the base year

Hence, the correct option is (b).

Example 9. The ______________ of group indices gives the General Index. (ICAI)
(a) H.M. (b) G.M. (c) A.M. (d) None of these
Sol. (c) A weighted average of the financial accounts of the group firms is used to construct
group indices. Each firm is assigned a weight based on how big it is in comparison to the
other companies in the group.
For instance, if Company B has $20 million in sales and Company A has $10 million,
Company B would be given more weight for determining the group revenue index.
As a result, it is an average measure. In essence, it depicts change over time more precisely
than a basic index number, making it more realistic.
Hence, the correct option is (c).
Example 10. In the price index, when a new commodity is required to be added, which of
the following index is used?
(a) Shifted price index (b) Splicing price index
(c) Deflating price index (d) Value price index
Sol. (b) We know that,
When a new commodity is required to be added in the price index, the index used is
called the Splicing price index. This involves combining the old and new data into a single

Index Number 15
 index to maintain the continuity of the index while accounting for changes in the basket
of goods and services used to calculate the index.
Hence, the correct option is (b).
Example 11. Circular Test is one of the tests of(ICAI)
(a) Index numbers (b) Hypothesis (c) Both (d) None of these
Sol. (a) The ‘Circular Test’ is one of the tests of Index Number.
Symbolically, the test is represented as P01× P12 × P20 = 1
Hence, the correct option is (a).
Example 12. The cost of living index is always (July 2021)
(a) Price index number (b) Quantity index number
(c) Weighted Index number (d) value index number
Sol. (c) Cost of living Index Number is nothing but weighted Index Number.
Hence the correct answer is option(c) i.e., Weighted index number.
Example 13. ______________ is particularly suitable for the construction of index numbers.
(a) H.M. (b) A.M. (c) G.M. (d) None of these (ICAI)
Sol. (c) The Geometric Mean (G.M.) is particularly suitable for constructing index numbers.
This choice is justified because:
1. 
It reflects proportionate changes: G.M. accurately represents changes in a series,
regardless of the size of those changes.
2. 
Less sensitivity to extreme values: G.M. is less influenced by extreme values, as it
multiplies rather than adds data points.
3. Suitable for logarithmic series: It works well with logarithmic data, simplifying the
calculation of the average.
4. Supports consumer behavior theory: G.M. helps analyze average price changes, a key
element in predicting consumer behavior.
Overall, the G.M. is a strong and trustworthy central tendency measure that is especially
well suited for the creation of index numbers. It is the perfect tool for analysing economic
and financial data since it can handle logarithmic series, represent proportional changes,
and lessen the impact of extreme values. Hence, the correct option is (c).
Example 14. Example. In the data group Bowley’s and Laspeyre’s index number is as follows:
Bowley’s index number = 150, Laspeyre’s index number = 180, then Paasche’s index number
(a) 120 (b) 30 (c) 165 (d) None of these
Sol. (a) Given: Bowley’s index number = 150
Laspeyre’s index number = 180
As we know, Bowley’s index number is expressed in the form of sum of Laspeyre’s and
Paasche’s divided by 2.
Laspeyre's + Paasche's
So, Bowley s index number =
2
Let Paasche’s index number be x, then

16 Quantitative Aptitude PW
 180 + x
⇒ 150 = ⇒ 300 = 180 + x ⇒ x = 120
2
Hence, the correct answer is option (a) i.e., 120.
Example 15. Weighted G.M. of relative formula satisfy ____________ test. (ICAI)
(a) Time Reversal Test (b) Circular test
(c) Factor Reversal Test (d) None of these
Sol. (a) We know that,
Weighted G.M. of relative formula satisfy Time Reversal test.
Hence, the correct option is (a).
Example 16. Factor Reversal test is satisfied by (ICAI)
(a) Fisher’s Ideal Index (b) Laspeyre’s Index
(c) Paasche’s Index (d) None of these
Sol. (a) Factor Reversal test holds when the product of the price Index and the quantity index
should be equal to the corresponding value index. i.e. P01 × Q01= V01
This test is satisfied by Fisher’s method .
Hence, the correct option is (a).
Example 17. G.M of Laspeyre’s and Paasche’s Price Index number is ____________ price index
number
(a) Kelly’s (b) Fisher’s (c) Bowley’s (d) None of these
Sol. (b) We know that,
Fisher’s Ideal Index is the geometric mean of Laspeyre’s and Paasche’s Price Index number.
Hence, the correct option is (b).
Example 18. Laspeyre’s formula does not satisfy (ICAI)
(a) Factor Reversal Test (b) Time Reversal Test
(c) Circular Test (d) All of the above
Sol. (d) We know that,
Laspeyre’s formula do not satisfy Factor Reversal Test, Time Reversal Test and Circular
Test. Hence, the correct option is (d).
Example 19. A ratio or an average of ratios expressed as a percentage is called (ICAI)
(a) A relative number (b) An absolute number
(c) An index number (d) None of these
Sol. (c) A ratio or an average of ratios stated as a percentage is called an index number. It
involves two or more time periods, one of which is the base period.
Hence the correct option is (c).
Example 20. The consumer price index goes up from 120 to 180 when salary goes up from
240 to 540 , what is the increase in real terms? (July 2021)
(a) 80 (b) 150 (c) 120 (d) 240
Sol. (c) Given;
The consumer price index goes up from 120 to 180.
Index Number 17
 Salary goes up from 240 to 540
180
Actual salary
= × 240 = 360
120
Salary increase in real terms = 360 - 240 = 120
Hence, the correct option is (c) i.e. 120.
Example 21. An index time series is a list of numbers for two or more periods of time.
(a) Index (b) Absolute (c) Relative (d) None of these (ICAI)
Sol. (a) A time series is a collection of data points that appear in a particular order over a
certain amount of time. Cross-sectional data, which records a moment in time, can be
compared to this.
A set of index numbers for two or more time periods that all use the same base years
is known as an index time series.
Hence the correct option is (a).
Example 22. Index numbers are often constructed from the (ICAI)
(a) Frequency (b) Class (c) Sample (d) None of these
Sol. (c) (i) S
 imple or Unweighted Index Numbers: Unweighted index numbers are index numbers
in which each item must have some weight even when no specific weight is given
to any item. It may be created using two methods, namely the simple aggregate
method and the simple average of price relatives method, and is also referred to
as a simple index number.
(ii) S
 imple Aggregative Method: This approach expresses the aggregate price of all
the selected commodities in the current year as the aggregate price of all the
commodities in the base year. The following formula is used to create an index
number:

Index
=
∑ P1 × 100
∑ P0
Hence, the correct option is (c).
Example 23. Fisher’s index number is called as ideal index number because it satisfies
(a) Factor reversal test (Dec 2022)
(b) Time reversal test
(c) Both factor and time reversal test
(d) Circular test
Sol. (c) We know,
Fisher’s index number is called the ideal index number because it satisfies both factor and
time reversal test. Hence, the correct option is (c).
Example 24. Among the following index numbers, which one satisfies the circular test?
(a) Laspeyre’s Index (b) Paasche’s Index
(c) Fisher’s Index (d) None of these
Sol. (d) We know that,
The circular test is satisfied if P01 × P12 × P20 = 1

18 Quantitative Aptitude PW
 Circular test is only satisfied by:
� Simple Aggressive method
� Simple Geometric mean of price relatives
Thus, Fisher’s ideal index, Laspeyre’s Index, Paasche’s Index does not satisfy the Circular
test. Hence, the correct answer is option (d) i.e., None of the above.

Example 25. If ∑ P0 Q0 = 406, ∑ P0 Q1 = 451, ∑ P1Q0 = 456, ∑ P1Q1 = 506 , then Fisher’s ideal
index number is
(a) 184.50 (b) 112.26 (c) 118.66 (d) 120.50

Sol. (b) Given: ∑ P0 Q0 = 406, ∑ P0 Q1 = 451, ∑ P1Q0 = 456, ∑ P1Q1 = 506

As we know, Fisher’s Ideal index is given by the formula,

∑ p1q0 × ∑ p1q1
Fisher’s
= Index Number × 100
∑ p0 q0 × ∑ p0 q1

456 506 11349

= × = × 100 × 100
406 451 16240

= 1.260122552 × 100 = 112.26

Hence, the correct answer is option (b) i.e., 112. 26.

Example 26. _____________ is a point of reference in comparing various data describing individual
behavior.
(a) Sample (b) Base period (c) Estimation (d) None of these (ICAI)
Sol. (b) We know that,
Base period is a point of reference in comparing various data describing individual behavior.
Hence, the correct option is (b).
Example 27. The ratio of price of single commodity in a given period to its price in the
preceding year price is called the (ICAI)
(a) Base period (b) Price ratio (c) Relative price (d) None of these
Sol. (c) The relative price is the ratio in the cost of a particular good in two different time
periods. This idea is frequently applied in economics to compare the cost of an item or
service over different time periods. Amount of Relative Price Matters
In order to compare the cost of products and services across time, relative pricing is
crucial. Economists may establish how the cost of an item or service has changed over
time by comparing the price of that good or service in one era to the price of that same
good or service in another period.
E.g.: The relative price of milk in 2020 , for instance, would be $I.33 ( $4 divided by
$3 ), if the price of a gallon of milk was $3 in 2010 and $4 in 2020. Accordingly, milk
will cost 33% higher in 2020 than it did in 2010 .
Hence, the correct option is (c).

Index Number 19
 Sum of all com mod ity price in the current year × 100
Example 28.
Sum of all com mod ity price in the base year
(a) Relative Price Index
(b) Simple Aggregative Price Index
(c) Both
(d) None of these
Sol. (b) In this method aggregate price of commodities in current year ∑P1 are divided by the
aggregate price of these commodities in the base year ∑P0 and expressed in percentage
P1
P0
= × 100
P0
where ∑P1– Sum of prices of commodities of current year
∑P0– Sum of prices of commodities of base year
Hence, the correct option is (b).
Example 29. Chain index is equal to (ICAI)
Link relative of current year × chain index of the current year
(a)
100
Link relative of previous year × chain index of the current year
(b)
100
Link relative of Current year × chain index of the Previous year
(c)
100
Link relative of Previous year × chain index of the Previous year
(d)
100
Sol. (b) The base is constant and unchanging throughout the series according to fixed base
approaches. However, as time goes on, certain items in the series could be added while
others might be taken out.
As a result, it is difficult to compare the outcome of the current circumstances with
that of the previous one. With this approach, we first represent each year’s numbers as
a percentage of the year before. Link Relatives are what these are called. The next step
is to multiply each one successively to link them together to create a chain index.
Current Year Relative × Previous Year Link Relative
Chain Index =
100
Hence, the correct option is (b).
Example 30. If Laspeyre’s Index is 119 and Paasche’s Index is 112. Then Fisher’s index number
will be (Dec 2022)
(a) 113.99 (b) 115.45 (c) 115.89 (d) 151.98
Sol. (b) Given: Laspeyre’s Index number = 119
Paasche’s Index Number = 112
As we know, Paasche’s and Laspeyre’s index numbers are combined to create the Fisher
index, which is the square root of that product.
20 Quantitative Aptitude PW
 Fisher’s ideal index number = Paasche's index number × Laspeyre's index numbers      
           =
   112 × 119 = 115.45
Hence, the correct answer is option (b).
Example 31. P01 is the index for time (ICAI)
(a) 1 on 0 (b) 0 on 1 (c) 1 on 1 (d) 0 on 0
Sol. (a) A ratio of two or more time periods, one of which being the base time period, is
called an index number. The standard point of comparison is the value from the base
time period.
Symbolically, P01 × P10 = 1
where P01 is the index for time 1 on 0 and P10 is the index for time 0 on 1 .
Hence, the correct option is (a).
Example 32. P10 is the index for time (ICAI)
(a) 1 on 0 (b) 0 on 1 (c) 1 on 1 (d) 0 on 0
Sol. (b) We know that, P01 × P10 = 1
where P01 is the index for time 1 on 0 and P10 is the index for time 0 on 1 .
Hence, the correct option is (b).

Example 33. If ∑ P0 Q0 = 240, ∑ P1Q1 = 480, ∑ P1Q0 = 600, ∑ P0 Q1 = 192 then the Laspeyre’s
Index number is (Nov 2018)
(a) 250 (b) 300 (c) 350 (d) 200
Sol. (a) As we know, Laspeyre’s Index number is formulated as,
Laspeyre’s Index number

=
∑ P1Q1 × 100
=
480
× 100 = 2.5 × 100 = 250
∑ P0 Q0 192

Hence, the correct answer is option (a) i.e., 250.

Example 34. In the year 2010, the price index for a particular item is 150 with the base
year 2005. What does this index value indicate?
(a) The prices of the item have decreased by 50% since 2005 .
(b) The prices of the item have increased by 50% since 2005 .
(c) The prices of the item have increased by 150% since 2005 .
(d) The prices of the item have increased by 50 units since 2005.
Sol. (b) Let the price of the base year (2005) be 100 .
Given as per the question,
Price of the current year (2010) = 150
Then, the percentage increase = 150-100 = 50%
Hence, the correct answer is option (b) i.e., the prices of the item have increased by 50%
since 2005.

Index Number 21
Example 35. When the product of price index and the quantity index is equal to the
corresponding value index then the test that holds is (ICAI)
(a) Unit Test (b) Time Reversal Test
(c) Factor Reversal Test (d) None holds
Sol. (c) It states that the value index should equal the product of a price index and a quantity
index. According to Fisher, each formula must allow for the interchange of two times
without producing inconsistent results, and it must also allow for the interchange of
prices and quantities without producing inconsistent results. This means that multiplying
two results together should produce the true value ratio.
Hence, the correct option is (c) i.e., Factor Reversal Test.
Example 36. The Index number in wholesale prices is 152 for August 1999 compared to
August 1998. During the year there is net increase in prices of wholesale commodities to the
extent of
(a) 45% (b) 35% (c) 52% (d) 48%
Sol. (c) Let the base price be 100
Given: Current Price =152
Percentage Increase = (152 - 100)% = 52%
Hence, the correct answer is option (c) i.e., 52%.
Example 37. Laspeyre’s method and Paasche’s method do not satisfy (ICAI)
(a) Unit Test (b) Time Reversal Test
(c) Circular test (d) both (b) and (c)
Sol. (d) We know that,
Laspeyre’s method and Paasche’s method do not satisfy both Time Reversal Test and
Circular test. Hence, the correct option is (d).
Example 38. An index number that can serve many purposes is known as a
(a) General purpose index (b) Special purpose index
(c) Both (a) and (b) are incorrect (d) Both (a) and (b) are correct
Sol. (a) To get the best results, it is important to make a clear decision on the index number’s
construction, its scope, and the variable it will be used to measure. choosing the base
year: The reference year is another name for the base year. It serves as the baseline for
comparisons.
Therefore, an index number that can serve many purposes is known as a General purpose
index.
Hence the correct option is (a).
Example 39. Which of the following statements is true? (Nov 2018)
(a) Paasche’s Index number is based on the base year quantity
(b) Fisher’s Index number is the arithmetic mean of Laspeyre’s Index number and Paasche’s
Index Numbers
(c) Arithmetic Mean is the most appropriate average for constructing the index number
(d) Fisher’s Index number is an Ideal Index Number

22 Quantitative Aptitude PW
Sol. (d) As we know, Paasche’s and Laspeyre’s index numbers are combined to create the
Fisher index, which is the square root of that product.
Fisher’s ideal index number= Paasche index number × Laspeyre's index numbers
Thus, The statement which is true is Fisher’s Index number is an Ideal Index Number.
Hence, the correct answer is option (d) i.e., Fisher’s Index number is an Ideal Index Number.
Example 40. The index number is a special type of average. (ICAI)
(a) False (b) True (c) Both (d) None of these
Sol. (b) An exclusive class of averages are index numbers. The technique of index numbers is
used to measure the relative changes in the level of a phenomenon when the measurement
of absolute change is not possible and the series are expressed in different types of items,
whereas mean, median, and mode measure the absolute changes and are used to compare
only those series which are expressed in the same units.
The use of index numbers allows for the measurement of changes in a single variable or
set of linked variables. For instance, a set of variables may include the price of sugar,
milk, and rice, whereas the price of wheat could be one of the variables.
Hence, the correct option is (b) i.e., True.
Example 41. The cost of living index numbers in years 2015 and 2018 were 97.5 and 115
respectively. The salary of a worker in 2015 was `19,500. How much additional salary was
required for him in 2018 to maintain the same standard of living as in 2015 ?
(a) 3000 (b) 4000 (c) 3500 (d) 4500
Sol. (c) Let the salary in 2018 be x,
Make a data table according to the question,
Year Cost of Living Index Salary
2015 97.5 19500
2018 115 x
Now, Salary in 2018 will be given as,

Cost of Living Index in 2018 115

× Salary in 2015
= × 19500
Cost of Living Index in 2015 97.5
So, salary of the worker in 2015 was 19500 and the additional salary required will be
given by,
= 23000-19500 = 3500
Hence, the correct option is (c).
Example 42. Fisher’s Ideal Formula does not satisfy __________ (July 2021)
(a) Unit Test (b) Circular Test
(c) Time Reversal Test (d) Factor Reversal Test
Sol. (b) As we know, the circular test is not satisfied by Fisher’s index number.
Each method has a unit test, with the exception of the simple aggregative method.
Thus, Fisher’s Ideal Formula does not satisfy the Circular test.
Hence, the correct answer is option (b).
Index Number 23
Example 43. _______________ satisfies circular test. (ICAI)
(a) G.M. of price relatives or the weighted aggregate with fixed weights
(b) A.M. of price relatives or the weighted aggregate with fixed weights
(c) H.M. of price relatives or the weighted aggregate with fixed weights
(d) None of these
Sol. (a) It is well known, the circular test is satisfied by the weighted aggregate with fixed
weights or the geometric mean of the price relatives but not by perfect indices.
As a result, the circular test is satisfied by G.M. of price relatives or the weighted aggregate
with fixed weights.
Hence, the correct answer is option (a).
Example 44. Laspeyre’s and Paasche’s method ____________ time reversal test. (ICAI)
(a) Satisfy (b) Do not satisfy
(c) Are (d) Are not
Sol. (b) The index for the later era based on the earlier period should equal the earlier period
based on the later period’s index, according to the time-reversal test.
i.e., P01 × P10 = 1
As a result, the time-reversal test using Laspeyres and Paasche’s technique is not satisfied.
Hence, the correct answer is option (b) i.e., do not satisfy.
Example 45. The number of test of Adequacy is (ICAI)
(a) 2 (b) 5 (c) 3 (d) 4
Sol. (d) We know, Test of Adequacy are as follow:
I. Unit Test
II. Time Reversal Test
III. Factor Reversal Test
IV. Circular Test
Thus, there are 4 test of Adequacy.
Hence, the correct answer is option (d).
Example 46. Theoretically, G.M. is the best average in the construction of index numbers but
in practice, mostly the A.M. is used.
(a) False (b) True (c) Both (d) None of these
Sol. (b) Although the geometric mean is known to be more difficult to compute than the
arithmetic mean, the outcomes it generates are more accurate and powerful.
Therefore, while it is true that, in theory, the G.M. is the optimum average for constructing
index numbers, in practice, the A.M. is typically utilized.
Hence, the correct answer is option (b) i.e., True.
Example 47. Laspeyre’s or Paasche’s or the Fisher’s ideal index do not satisfy (ICAI)
(a) Time Reversal Test
(b) Unit Test
(c) Circular Test
(d) None of these

24 Quantitative Aptitude PW
Sol. (c) As we know,
The Laspeyre’s, Paasche’s, or Fisher’s ideal index does not satisfy the Circular Test.
Hence, the correct answer is option (c).
Example 48.____________ is concerned with the measurement of price changes over a period of
years, when it is desirable to shift the base. (ICAI)
(a) Unit Test (b) Circular Test
(c) Time Reversal Test (d) None of these
Sol. (b) The Circular test can be used to gauge price changes over a period of years when the
base has to be adjusted.
The measuring of price changes over a number of years when it is appropriate to relocate
the base is thus the focus of the circular test.
Hence, the correct answer is option (b).
Example 49. The test of shifting the base is called (ICAI)
(a) Unit Test
(b) Time Reversal Test
(c) Circular Test
(d) None of these
Sol. (c) The Circular test can be used to gauge price changes over a period of years when the
base has to be adjusted.
When index numbers are utilized, it is also possible to measure price changes over a longer
period of time rather than only comparing prices over two years. In many cases, changing
the foundation is desirable. Thus, the test of shifting the base is called the Circular test.
Hence, the correct answer is option (c).
Example 50. The formula for conversion to current value

Price Index of the current year

(a) Deflated value =
Previous value

Current value
(b) Deflated value =
Price Index of the current year

Price Index of the Previous year

(c) Deflated value =
previous value

Price Index of the Previous year

(d) Deflated value =
previous value

Sol. (b) As we know, the current value can be expressed mathematically as the result of the
deflated value and the current year’s price index.
Current value
It is formulated as, Deflated Value =
Price Index of the current year

Hence, the correct answer is option (b).

Index Number 25
 Original Price ×100
Example 51. Shifted price Index =
Price Index of the year on which it has to be shifted

(a) True (b) False (c) Both (d) None of these

Sol. (a) The ratio of the original price and the price index of the year on which it must be
shifted full, multiplied by 100 , is the formula for the “Shifted Price Index.”
It is formulated as, Shifted Price Index

Original Price ×100

=
Price Index of the year on which it has to be shifted

Hence, the correct answer is option (a) i.e., True.

Example 52. The weighted aggregative price index numbers for 2001 with 2000 as the base
year using Paasche’s index number is (July 2021)

Commodity PPrice in ` Quantities

2000 2001 2000 2001
A 10 12 20 22
B 8 8 16 18
C 5 6 10 11
D 4 4 7 8

(a) 112.32 (b) 112.38 (c) 112.26 (d) 112.20

Sol. (d) According to the data given,

Commodity Price in (`) Quantities
2000 2001 2000 2001
P0 P1 Q0 Q1 P1Q1 P0Q1
A 10 12 20 22 264 220
B 8 8 16 18 144 144
C 5 6 10 11 66 55
D 4 4 7 8 32 32
∑P1Q1=506 ∑P0Q1= 451
We know that, Paasche’s index number

P01
=
∑ P1Q1 × 100
=
506
× 100 = 112.195 = 112.20
∑ P0 Q1 451
Hence, the correct option is (d).
Example 53. The weighted aggregative price index numbers for 2001 with 2000 as the base
year using Marshal -Edgeworth Index number is (July 2021)

26 Quantitative Aptitude PW
 Commodity Price in (`) Quantities
2000 2001 2000 2001
A 10 12 20 22
B 8 8 16 18
C 5 6 10 11
D 4 4 7 8
(a) 112.26 (b) 112.20 (c) 112.32 (d) 112.38
Sol. (a)
Commodity Price in (`) Quantities
2000 2001 2000 2001
P0 P1 Q0 Q1 P1(Q0 + Q1) P0(Q0 + Q1)
A 10 12 20 22 504 420
B 8 8 16 18 272 272
C 5 6 10 11 126 105
D 4 4 7 8 60 60
Total 962 557
Marshal -Edgeworth index number

=
∑ P1 (Q0 + Q1 ) × 100
=
962
× 100 = 112.25 = 112.26
∑ P0 (Q0 + Q1 ) 857
Hence, the correct option is (a).
Example 54. From the following data

Commodity A B C D
1992 Base year Price 3 5 4 1
Quantity 18 6 20 14
1993 Current year Price 4 5 6 3
Quantity 15 9 26 15

The Paasche’s price index number is :

(a) 146.41 (b) 120.50 (c) 164.82 (d) None of these

Sol. (a) According to the data given,

Commodity P0 Qo P1 Q1 P0Q0 P1Q0 P0Q1 P1Q1

A 3 18 4 15 54 72 45 60

B 5 6 5 9 30 30 45 45

Index Number 27
 Commodity P0 Qo P1 Q1 P0Q0 P1Q0 P0Q1 P1Q1

C 4 20 6 26 80 120 104 156

D 1 14 3 15 14 42 15 45

∑ P 0 Q 0 ∑P 1 Q 0 ∑P 0 Q 1 ∑P 1 Q 1
= 178 = 264 = 209 = 306
We know that,

Paasche’s Price index

= P02
∑ P1Q1 × 100
=
306
× 100
⇒ 1.46411 X 100 02
∑ P0 Q1 209

⇒ P02 = 146.41 02
Therefore, Paasche’s Price index = 146.41
Hence, the correct answer is option (a) i.e., 146.41.

Example 55. The prices and quantities of 3 commodities in base and current years are as
follows: (June 2019)

p0 p1 q0 q1
12 14 10 20
10 8 20 30
8 10 30 10

The Laspeyre’s Index number is:

(a) 118.13 (b) 107.14 (c) 120.10 (d) None of these

Sol. (b) Make a data table according to question,

po p1 q0 q1 p0q0 p1q0
12 14 10 20 120 140
10 8 20 30 200 160
8 10 30 10 240 300
∑p0q0 = 560 ∑p1q0= 600

As we know, Laspeyre’s Index number is formulated as,

Laspeyre’s Index number

=
∑ p1q0 × 100
∑ p 0 q0
Put the values in the formula and compute,
600
= × 100 = 107.14
560
Hence, the correct answer is option (b).

28 Quantitative Aptitude PW
Example 56. With the base year 1960 the C.L.I in 1972 stood at 250. x was getting a
monthly salary of ` 500 in 1960 and `750 in 1972. In 1972 to maintain his standard of
living in 1960, x has to receive as extra allowances of
(a) `600 (b) `500 (c) ` 300 (d) None of these
Sol. (b) Given: Base Price = `500; Index Number = 250
Index number is given by the formula,

Current Year Price

Index number
= × 100
Base Year Price

Put the values and compute for Current year price,

Current Year Price =

(
250 500 ) = 1250
100
Now, D.A (x) will be given as,
D.A (x) = 1250-750 = 500
Hence, the correct answer is option (b) i.e., `500.
Example 57. If the ratio between Laspeyres index number and Paasche’s index number is
28 : 27. Then the missing figure in the following table P is (ICAI)

Commodity Base Year Current Year

Price Quantity Price Quantity
X L 10 2 5
Y L 5 P 2

(a) 1 (b) 4 (c) 3 (d) 0

Sol. (b)
Commodity P0 Q0 P1 Q1 P0Q0 P1Q0 P0Q1 P1Q1
X L 10 2 5 10L 20 5L 10
Y L 5 P 2 5L 5P 2L 2P
∑P0Q0 ∑P1Q0 ∑P0Q1 ∑P1Q1
= 15 L = 20 + 5P =7L = 10 + 2P
As we know, Laspeyre’s index number is formulated as,

=
∑ P1Q0 × 100 =
20 + 5P
× 100
∑ P0 Q0 15L
Paasche’s index number is given by the formula,

=
∑ P1Q1= × 100
10 + 2P
× 100
∑ P0 Q1 7L

Index Number 29
 Now, as per the question,
20 + 5P
× 100
28 15L
⇒ =
27 10 + 2P
× 100
7L
⇒ 9(20 + 5P) = 20(10 + 2P) ⇒ 180 + 45P = 200 + 40P ⇒ 5P = 20 ⇒ P = 4
Hence, the correct option is (b).

PRACTICE QUESTIONS (PART A)

1. The most commonly used mathematical method for finding secular trends is
(a) Moving (b) Simple average
(c) Exponential (d) None of these
2. For year 2015, price index was 267% with base year 2005. The percentage increase in
price index over base year 2005 is
(a) 26% (b) 67% (c) 167% (d) None of these
3. The cost of living index numbers in 2015 and 2018 were 97.5 and 115 respectively.
The salary of a worker in 2015 was ` 19500 . How much additional salary was required
for him in 2018 to maintain the standard of living as in 2015 ?
(a) 3000 (b) 4000 (c) 3500 (d) 4500
4. The prices and quantities of 3 commodities in base and current years are as follows:
P0 P1 Q0 Q1
12 14 10 20
10 8 20 30
8 10 30 10

The Laspeyre price index is

(a) 118.13 (b) 107.14 (c) 120.10 (d) None of these
5. Which is not satisfied by fisher’s ideal index number?
(a) Factor Reversal Test (b) Time Reversal Test
(c) Circular Test (d) None of the above
6. Which is called an ideal index number?
(a) Laspeyre’s index numbers
(b) Pasche’s index number
(c) Fisher’s index number
(d) Marshall Edgeworth index number

7. If ∑ p0 q0 = 240, ∑ p1q1 = 480, ∑ p1q0 = 600 and ∑ p0 q1 =

192 , then laspeyre’s Index
number is
(a) 250 (b) 300 (c) 350 (d) 200

30 Quantitative Aptitude PW
 8. If Laspeyre’s index number is 250 and paasche’s index number is 160 , then fisher’s
index number is
25 16
(a) 40000 (b) (c) 200 (d)
16 25
9. Which of the following statements is true? (Nov 2018)
(a) Paasche’s index number is based on the base year quantity
(b) Fisher’s index number is the Arithmetic mean of Laspeyre’s index number and Paasche’s
index number
(c) Arithmetic mean is the most appropriate average for constructing the index number
(d) Fisher’s index number is an ideal index number
10. The number of test of Adequacy is (May 2018)
(a) 2 (b) 5 (c) 4 (d) 3
11. If the 1970 index with base with 1965 is 200 and 1965 index with base 1900. Is 150,
the index 1970 on base 1960 will be:
(a) 700 (b) 300 (c) 500 (d) 600
12. Circular test is satisfied by
(a) Laspeyre’s index number
(b) Paasche ‘s index number
(c) The simple geometric mean of price relatives and the weighted aggregative with fixed
weights.
(d) None of these
13. Price relative is expressed in term of
Pn P0 Pn P0
(a) p = (b) p = p
(c) = × 100 p
(d) = × 100
P0 Pn P0 Pn

14. The circular test is an extension of  (May 2018)

(a) The time reversal test (b) The factor reversal test
(c) The unit test (d) None of these

15. If ∑ P0 Q0 = 1360, ∑ Pn Q0 = 1900, ∑ P0 Qn = 1344, ∑ Pn Qn = 1880 , then Laspeyre’s index

number is (May 2018)

(a) 0.71 (b) 1.39 (c) 1.75 (d) None of these
16. The cost of living index is always
(a) Price index number (b) Quantity index number
(c) Weighted Index number (d) Value index number
17. P01 is the index for time (May 2018)
(a) 1 on 0 (b) 0 on 1 (c) 1 on 1 (d) 0 on 0

Index Number 31
18. If Laspeyre’s index number is 110 and Fisher’s ideal number is 109 , then Paasche’s
index number is
(a) 108 (b) 110 (c) 109 (d) 18

19. When the prices for quantities consumed of all commodities are changing in the same
ratio, then the index numbers due to Laspeyre’s and Paasche’s will be
(a) Equal
(b) Unequal
(c) Reciprocal of Marshall Edge worth index number
(d) Reciprocal of fisher index number

20. If ∑ P0 Q0 =116, ∑ P0 Q1 =140, ∑ P1Q0 =97, ∑ P1Q1 =117 then Fisher’s ideal index
number is
(a) 184 (b) 83.59 (c) 119.66 (d) 120

21. If the 1970 index with base 1965 in 200 and 1965 index with base 1960 is 150 , the
index 1970 on the base 1960 will be:
(a) 700 (b) 300 (c) 500 (d) 600

22. The index number for the year 2012 taking 2011 as base using simple average of price
relatives method from data given below is:

Commodity A B C D E
Price in 2011 (P0) 115 108 95 80 90 ∑ P0 =488
Price in 2012 (P1) 125 117 108 95 95 ∑ P1 =540

(a) 112 (b) 117 (c) 120 (d) 111

23. Bowley’s index number is expressed in terms of

Laspeyre's + Paasche's
(a) (b) Laspeyre ' s ×Paasche ' s
2 2
Laspeyre ' s − Paasche ' s
(c) (d) None of these
2
24. Fisher’s ideal formula for calculating index number satisfies the
(a) Unit Test (b) Factor Reversal Test
(c) Both (a) and (b) (d) None of these
25. Circular Test is satisfied by:
(a) Paasche’s Index Number
(b) The simple geometric mean of price relatives and the weighted aggregative fixed
weights
(c) Laspeyre’s Index Number
(d) None of these

32 Quantitative Aptitude PW
26. Cost of living index numbers are also used to find real wages by the process of’
(a) Base shifting (b) Splicing of index numbers
(c) Deflating of index numbers (d) None of these
27.The prices of a commodity in the years 1975 and 1980 were 25 and 30 respectively
then Price relative of 1975 on 1980 is:
(a) 113.25 (b) 83.33 (c) 109.78 (d) None of these
28. Laspeyre’s and Paasche’s Method ________ Time Reversal Test.
(a) Do not satisfy (b) Satisfy
(c) Depends on the case (d) Can’t say Time Reversal Test
29. Consumer Price Index number goes up from 100 to 200 and salary of a worker is also
raised from 300 to 500 . The Real wage is
(a) 300 (b) 250 (c) 600 (d) 350
30. Paasche’s price index is a weighted aggregate price index in which ________________quantities
are taken as weights.
(a) Base year
(b) Current year
(c) Average of base year and current year
(d) None of these
31. From the following data, calculate price index number for 2010 with 2000 as base by
Fisher’s Index Number.
Commodity 2000 2010
Price Quantity Price Quantity
A 20 8 40 6
B 50 10 60 5
C 40 15 50 15
D 20 20 20 25

(a) 150.50 (b) 123.24 (c) 130.65 (d) None of these

32. From the following data, calculate price index number for 2007 with 2006 as base by
Marshall-Edgeworth method.

Commodity 2000 2010

Price Quantity Price Quantity
A 10 100 12 150
B 8 80 10 100
C 5 60 10 72
D 24 30 18 33

(a) 118.64 (b) 132.40 (c) 140.75 (d) None of these

Index Number 33
Answer Key
1. (b) 2. (c) 3. (c) 4. (b) 5. (c) 6. (c) 7. (a) 8. (c) 9. (d) 10. (c)
11. (b) 12. (c) 13. (c) 14. (a) 15. (b) 16. (c) 17. (a) 18. (a) 19. (a) 20. (b)
21. (b) 22. (d) 23. (a) 24. (c) 25. (b) 26. (c) 27. (b) 28. (a) 29. (b) 30. (b)
31. (b) 32. (a)

SUMMARY
Index numbers are the most important need in the study of statistics. If you were to modify
the variable in the estimation of any particular statistics, just imagine how it would be without
these data! The technique will be wholly ineffectual in and of itself. The measurement of any
change in a variable or variables over a predetermined period is therefore done via index
numbers. These figures represent a broad relative shift rather than a specific quantifiable
value. A percentage is used to express an index number.
Learn more about the Index numbers so that we may explore their significance, traits,
categories, and restrictions. Continue reading the material to learn more about the
supplementary part that we have included.

IMPORTANCE OF INDEX NUMBER

In studies of a region’s economic situation, index numbers are most frequently utilised. The
level of a variable in relation to its level across a specific time period is defined by the index
number, as was previously indicated. These index values are used to analyse how the impact
of all the variables that cannot be directly measured or approximated vary over time.
Due to their effectiveness in determining the magnitude of economic changes over a given
time period, index numbers therefore have a significant position. The impact of such changes
owing to variables that cannot be assessed directly are studied.

THE FOLLOWING ARE SOME OF THE KEY DISTINGUISHING

CHARACTERISTICS OF INDEX NUMBERS
‰ When absolute measurement cannot be done, this specific category of average is used to
assess relative changes.
‰ Only speculative changes in variables that may not be immediately measurable are shown
by index numbers. It provides a broad overview of the relative changes.
‰ The index number measurement technique varies from one connected variable to another.
‰ It facilitates comparing the levels of a phenomena on a given day to those from earlier
dates.
‰ It serves as an example of an uncommon average, particularly for a weighted average.
‰ Index numbers are useful everywhere. You may also utilise the index that is used to
determine price fluctuations.

SIMPLE AGGREGATE METHOD

This approach is predicated on the idea that different things and their pricing are given in
the same units. Each thing is given the same importance. The following is the formula for a

straightforward aggregative pricing index:

= P01
∑ P1 × 100
∑ P0
34 Quantitative Aptitude PW
where,
∑P1 is the total of current year’s prices for the various items.
∑P2is the total of base year’s prices for the various items.

VARIOUS INDEX NUMBER TYPES

Different sorts of index numbers are used in certain ways. To understand the same, we shall
study the various index numbers. The students will get an understanding of the significance
of each form of Index number in relation to the assignment they are practising for from this
lesson on the many sorts of Index numbers.
‰ Price Index: The ratio of the aggregate value for a given period to the aggregate value
found in the base period yields a value index number. The value index is used, among
other things, for inventory, sales, and international commerce.
Pn
Price relative
= × 100
P0

‰ Quantity Index: When measuring changes in the volume or amount of items produced,
consumed, and sold within a given time frame, a quantity index number is utilised. It
displays the relative change over a time period for certain product quantities. An
illustration of a quantity index is the Index of Industrial Production (IIP)
Qn
Quantity Relative
= × 100
Q0

‰ Value relative : The value relative considers the value of a commodity by multiplying the
price and quantity relatives together.
Vn Pn Qn Pn Qn
Value Relative = = × =
V0 P0 Q0 P0 Q0

USES OF INDEX NUMBER IN STATISTICS

In several straightforward to complex research, index numbers are helpful. Like it is used
in the basic study of human population in a country and also it is used to determine the
extinction rate of the rare animals in a particular region. There are many more applications
for index numbers; here are some examples:
‰ It aids in gauging changes in both pricing levels and living standards.
‰ Regulation of wage rates is compatible with shifts in the level of prices. Wage rates may
change when pricing levels are established.
‰ The index number of prices is used to frame government policy. Index numbers serve as
the foundation for the built-in price stability of fiscal and economic policy.
‰ It provides a starting point for comparing many economic factors internationally, such
as the living standards of two nations.

Index Number 35
 ADVANTAGES OF INDEX NUMBER

‰ Index numbers’ benefits are closely related to how they are used. In conclusion, the benefits
are as follows: It makes cost-effective adjustments to primary data, which is helpful for
deflation. It makes the switch from nominal wage to real wage easier.
‰ In economics, index numbers are frequently used to aid in the formulation of effective
policies. These results also aid in the development of research.
‰ It is useful for patterns like making conclusions for cyclical and irregular forces.
‰ In the event that economic activity develops in the future, index numbers can be useful.
To identify patterns and cyclical processes, this time series analysis is used.
‰ The figure is helpful in gauging changes in living standards across various nations over a
predetermined time frame.

ISSUES IN THE CONSTRUCTION OF INDEX NUMBERS

The following are some considerations for the development of an index number that should
be made:
‰ Purpose of Index number
‰ Selection of Items
‰ Choice of Average
‰ Assignment of weights
‰ Choice of Base year

LASPEYRE’S METHOD:
= 
∑  P1Q0 
 × 100
 ∑P Q 
 0 0 

Here, ∑ P1Q0 represents the sum of prices for the current year times the base year’s quantity
weights, and ∑ P0 Q0 represents the sum of prices for the base year times the base year’s
quantity weights.

PAASCHE’S METHOD:
= 
∑  P1Q1 
 × 100
 ∑P Q 
 0 1 

Here, ∑ P1Q1 is the sum of current year prices multiplied by current year quantities taken
as weights, and ∑ P0 Q1 is the sum of base year prices multiplied by current year quantities
taken as weights.

MARSHALL- EDGEWORTH=
METHOD: ∑ Pn (Q0 + Qn ) × 100
∑ P0 (Q0 + Qn )
 ∑ P Q   ∑P Q 
FISHER’S METHOD:=  1 0
× 1 1
  × 100

 ∑ P Q
0 0
  ∑P Q 
  0 1 

Fisher’s ideal index number is an ideal index number.

36 Quantitative Aptitude PW
DORBISH AND BOWLEY’S PRICE INDEX:

∑ Pn Q0 ∑ Pn Qn
Dorbish and Bowley’s
= Price Index
∑ P0 Q0 ∑ P0 Qn × 100
2

LIMITATIONS OF INDEX NUMBER:

We are aware that everything in the world has both benefits and drawbacks. Although index
numbers offer many benefits, this is also where some of its drawbacks appear. The following
are some index numbers’ restrictions:
‰ Given that index numbers are generated from samples, there is a risk for inaccuracy.
These samples are assembled after careful consideration, which increases the possibility
of mistakes. It can also be found in base periods, weights, etc.
‰ It is always determined using the things. Items that are so carefully chosen may not
accurately reflect current trends, which leads to erroneous analysis.
‰ The index numbers provide a rough idea of the relative changes that take place.
‰ The choice of representative goods could be biased.

MAIN CHARACTERISTICS OF INDEX NUMBERS

Index numbers are a particular kind of average that

1. give a measurement of relative changes in the frequency of a certain phenomena;
2. are stated in terms of percentages to demonstrate the magnitude of relative change
3. quantify relative changes.
4. They are also capable of measuring changes that are not readily quantifiable.
Economic barometers are index numbers. They aid in the creation of economic policy, planning,
and other things. They are employed in the analysis of trends and patterns. Indicators like
index numbers can be used to predict future economic activity. They gauge the value of
money in terms of purchases.



Index Number 37