Suppose a business executive was earning rs.2050 in the base period wh...
Calculating Salary in Current Period
Understanding the Given Information
- Base Period Salary (BPS) = Rs. 2050
- Index Number of the Base Period (IB) = 100
- Index Number of the Current Period (IC) = 3544
- Conversion Factor (CF) = IC/IB = 3544/100 = 35.44
- Wage Rate (W) = 25
Calculating Salary in Current Period
The salary in the current period can be calculated using the following formula:
Salary in Current Period (CPS) = BPS x (CF/W)
Substituting the values in the above formula:
CPS = 2050 x (35.44/25) = 2896.32
Therefore, the executive's salary in the current period should be Rs. 2896.32 if his standard of living is to remain the same.
Explanation
The given information provides the base period salary, index numbers of the base period and current period, and the wage rate. Using this information, we can calculate the conversion factor which indicates the change in the cost of living from the base period to the current period. The wage rate represents the average earnings of workers in the current period. Using the conversion factor and wage rate, we can calculate the salary in the current period that is equivalent to the base period salary in terms of purchasing power. This allows us to compare the standard of living of the executive in the base period and the current period.