Short Questions and Answers: Index Numbers - 1

Q.1. What is index number?
Ans. An index number is a statistical measure that shows the relative change in a single variable or a group of related variables between two periods or situations. It is usually expressed relative to a chosen base period, which is assigned a value of 100.
Q.2. State any one feature of index numbers.
Ans. Index numbers are normally expressed in terms of percentages with respect to a base value (commonly 100), which makes it easy to compare changes over time or between places.
Q.3. Define base period.
Ans. The base period is the specific period chosen for comparison; its value is fixed (usually as 100) and all subsequent or previous values are compared against it to measure relative change.
Q.4. What does an index number of 150 reflect?
Ans. An index number of 150 means the measured value is 150% of the base period value - that is, it is one and a half times the base value, or a 50% increase over the base period.
Q.5. What does quantity index numbers measure?
Ans. Quantity index numbers measure changes in the physical volume or quantity of activity, such as production, construction or employment, over time; they show real changes in output independent of price movements.
Q.6. What does a production index indicate?
Ans. A production index indicates the level and direction of output in the economy relative to a base period; it helps to assess whether industrial production is rising or falling and to estimate changes in national income.
Q.7. State the uses of index number.
Ans. The important uses of index numbers are:
(i) Makes complex facts simple: Index numbers reduce large sets of data to a single figure so changes are easier to understand and compare.
(ii) Studies changes in general value: They help measure changes in the general price level or in the purchasing power of money over time.
(iii) Determines salary and dearness allowance: Consumer price indices are used to adjust wages and allowances to protect real incomes against inflation.
(iv) Estimates change in national income: Production indices show movements in output and thus assist in estimating changes in national income.
Q.8. Mention the limitations of index number.
Ans. The main limitations of index numbers are:
(i) Choice of basket: Selection of items for the index may be based on samples and can therefore be unrepresentative or misleading.
(ii) Long-period comparisons: Comparisons over long periods may be unreliable because consumption patterns and relative importance of items change.
(iii) Approximate measure: Index numbers provide only an approximate indication of relative change, not exact values.
(iv) Errors in base and weights: Incorrect choice of base period or wrong weights can distort results.
(v) Averaging limitations: As special forms of averages, index numbers inherit limitations common to averages, such as sensitivity to outliers.
Q.9. What is the simple aggregate method?
Ans. In the simple aggregate method, the sum of current period prices (or quantities) is divided by the sum of base period prices (or quantities) and the result is multiplied by 100. In formula form: (ΣP_t / ΣP₀) × 100.
Q.10. Give one point of difference between Laspeyres and Paasche price index.
Ans. Laspeyres price index uses base period quantities as weights, while Paasche price index uses current period quantities as weights. As a result, Laspeyres tends to give more weight to items that were important in the base period, whereas Paasche reflects the current pattern of consumption or production.
Q.11. Why is the base period weight is preferred to the current period weight?
Ans. Base period weights are preferred because they are stable and easier to obtain from standard surveys; using them avoids the difficulty and expense of collecting new weights every year and allows consistent comparison over time.
Q.12. Differentiate between simple index number and weighted index number.
Ans. In a simple index number, all items carry equal importance and the index is calculated from the prices (or quantities) of each item without any weights. In a weighted index number, different items are given different weights according to their relative importance (for example, expenditure shares), so changes in more important items influence the index more.
Q.13. Name the methods used for constructing consumer's price index.
Ans. The main methods used for constructing the Consumer Price Index are:
(i) Aggregative expenditure method: Uses total expenditure on a fixed basket of goods and compares expenditure across periods.
(ii) Family budget method: Builds the index from the typical household budget or consumption pattern of a specified group of consumers.
Q.14. What does wholesale price index indicate?
Ans. Wholesale Price Index (WPI) indicates changes in the general price level at the wholesale stage, showing price movements of a basket of goods traded in bulk; it is commonly used to measure inflation at the producer/wholesale level.
Q.15. Define index number of industrial production.
Ans. The Index of Industrial Production (IIP) measures the relative increase or decrease in the volume of industrial output in a country compared with a chosen base year. It is compiled from quantities of a selected set of industrial goods, usually weighted by their importance.

Q.16. State the importance of Consumer Price Index.
Ans. Consumer Price Index is important due to the following reasons:
(i) Measures change in living expenditure: It shows how the cost of living for a particular class of consumers has changed over time.
(ii) Helps estimate payments: It is used to adjust wages, pensions and other incomes to protect recipients from inflation.
(iii) Acts as an inflation measure: CPI serves as an indicator of general inflation affecting consumers.
(iv) Guides policy-making: It helps policymakers design measures to control prices and protect vulnerable groups.
Q.17. How are the commodity weights are determined in the WPI?
Ans. Commodities in the WPI are broadly classified into three groups: primary articles, fuel, power, light and lubricants, and manufactured products. Their weights are determined by the total value (price × quantity) of domestic production and imports (including import duty) of each commodity during the base year; these value shares become the weights in the index.
Q.18. What are the uses of WPI?
Ans. The uses of WPI are:
(i) Deflator for aggregates: It helps remove the effect of price changes when measuring national aggregates such as national income and capital formation.
(ii) Measures inflation rate: WPI provides a measure of inflation at the wholesale level and indicates price trends.
(iii) Signals demand-supply balance: A rising WPI suggests excess demand or cost pressures, while a falling WPI points to weaker demand.
Q.19. State the difference between CPI and WPI.
Ans. Consumer Price Index (CPI) measures the cost of living for a specified group of consumers and is based on retail prices of goods and services bought by households. Wholesale Price Index (WPI) measures price movements at the wholesale or producer level and is used to assess aggregate demand-supply conditions and inflation at earlier stages of the market.
Q.20. What is the use of index number in Sensex?
Ans. Sensex is a stock market index that tracks the performance of a selected group of leading companies. It is used as a quick guide for investors and analysts: a rising Sensex indicates improving market conditions and expectations of higher corporate earnings, while a falling Sensex signals weakening market sentiment.
Q.21. State the various uses of index numbers in economics.
Ans. The various uses of index numbers in economics are:
(i) Policy formulation: CPI helps design policies related to wages, taxation, subsidies and price control.
(ii) Deflating aggregates: WPI is used to remove price effects from national aggregates so real growth can be measured.
(iii) Sectoral performance: Indices of industrial and agricultural production give quantitative measures of output changes in those sectors.
(iv) Investment guidance: Market indices such as Sensex guide investors about overall market trends and help in investment decisions.