Class 11 Economics Short Questions and Answers: Index Numbers - 1

Q.1. What is index number?
Ans. Index number is a statistical tool for measuring change in variable or a group of related variables over two different situations.

Q.2. State any one feature of index numbers.
Ans. Index numbers are expressed in terms of percentage.

Q.3. Define base period.
Ans. Base period is the period with which the comparison is to be made.

Q.4. What does an index number of 150 reflect?
Ans. An index number of 150 reflect that the value is one and half times that of the base period.

Q.5. What does quantity index numbers measure?
Ans. Quantity index numbers measure the changes in the physical volume of production, construction or employment.

Q.6. What does a production index indicate?
Ans. A production index indicates the level of output in the economy.

Q.7. State the uses of index number.
Ans. The important uses of index number are:
(i) Makes Complex Facts Simple: Index numbers enable the measure of the facts whose measure is not possible by any other method. For example, simple measure of trade processes is not possible.
(ii) Studies Changes in General Value: Index number helps measuring the changes in general price level or changes in the purchasing power of money.
(iii) Determines Salary and Dearness Allowance: Consumer price index helps to know about the changes in the expenditure on living standards of different classes of society. This is helpful in determining wages for labourers and dearness allowances for the servants.
(iv) Estimates Change in National Income: A production index indicates the level of output and national income in the economy.

Q.8. Mention the limitations of index number.
Ans. The main limitations of index numbers are:
(i) The choice of basket goods may lead to misleading conclusions as they are based on samples.
(ii) The comparisons of changes in variables are not reliable over long periods.
(iii) They are only approximate indications of relative changes.
(iv) There may be errors in the choosing base periods or weights.
(v) They are specialised types of averages and hence, are subject to all the limitations which an average suffers.

Q.9. What is the simple aggregate method?
Ans. In this method, aggregate of the prices of commodities in the current year are divided by the aggregate of their prices in the base year and multiplied by 100.

Q.10. Give one point of difference between Laspeyres and Paasche price index.
Ans. Laspeyres price index uses base period quantities as base while Paasche price index uses current period quantities as weights.

Q.11. Why is the base period weight is preferred to the current period weight?
Ans. The base period weight is preferred to the current period weight because it is inconvenient to calculate weight every year.

Q.12. Differentiate between simple index number and weighted index number.
Ans. In simple index numbers, all the items are given equal importance. The index is calculated only on the basis of the price of each item. In weighted index number, on the other hand, weights assigned to the various items according to their relative importance.

Q.13. Name the methods used for constructing consumer’s price index.
Ans. The methods used for constructing consumer’s price index are:
(i) Aggregative expenditure method
(ii) Family budget method

Q.14. What does wholesale price index indicate?
Ans. Wholesale Price Index (WPI) indicates the change in the general price level.

Q.15. Define index number of industrial production.
Ans. Index number of Industrial Production (IIP) measures the relative increase or decrease in the level of industrial output in a country in comparison to the level of production in the base year.

Q.16. State the importance of Consumer Price Index.
Ans. Consumer Price Index is important due to the following reasons:
(i) It helps to determine the change in the living expenditure of a particular class of society.
(ii) It helps to estimate the payments of various kinds to the workers.
(iii) It acts as a measure of general inflation.
(iv) It helps in formulating the policies to control the price of the commodities.

Q.17. How are the commodity weights are determined in the WPI?
Ans. Commodities are broadly classified into three categories - primary articles, fuel, power, light and lubricants and manufactured products. The commodity weights in the WPI are determined by the weekly estimates of the commodity value of domestic production and imports (inclusive of import duty) during the base year.

Q.18. What are the uses of WPI?
Ans. The uses of WPI are:
(i) It helps to eliminate the effect of price change on national level aggregates such as national income, capital formation, etc.
(ii) It measures the rate of inflation in the economy.
(iii) It determines the situation of demand and supply in the economy. Increase in WPI indicates a situation of excess demand while decrease in WPI indicates a situation of deficient demand.

Q.19. State the difference between CPI and WPI.
Ans. CPI aims to determine the cost of living of a specified group of consumers in the society. WPI, on the other hand, tries to assess the situations of aggregate demand and supply in the economy.

Q.20. What is the use of index number in Sensex?
Ans. Sensex is the index showing changes in the Indian stock market. Sensex is a useful guide for investors in the stock market. If the Sensex is rising, it indicates that the market is doing well and investors can expect better earnings from companies.

Q.21. State the various uses of index numbers in economics.
Ans. The various uses of index numbers in economics are:
(i) Consumer Price Index (CPI) helps to formulate policies related to income, price, rent control, taxation and other general economic issues.
(ii) Wholesale Price Index (WPI) helps in eliminating the effect of price change on national level aggregates such as national income, capital formation, etc. it also measures the rate of inflation in the economy.
(iii) Index of industrial and agricultural production gives a quantitative figure about the change in production and performance in the respective sectors.
(iv) Sensex is a useful guide for investors in the stock market.