Paper 4: Fundamentals of Business Mathematics & Statistic

7.14 I FUNDAMENTALS OF BUSINESS MATHEMATICS AND STATISTICS

Index Numbers

The consumer price index is also known as cost of living index or retail price index.

Methods of Constructing Consumer Price Index

The consumer price index can be constructed by any of the following two methods :

(1) Aggregate Expenditure Method or Aggregative Method

(2) Family Budget Method or the Method of Weighted Relatives

7.7 AGGREGATE EXPENDITURE METHOD

This method is similar to the Laspeyres’ method of constructing a weighted index. In this method the quantities

of various commodities consumed in the base year by a particular class of people are taken as weights.

Consumer Price Index =

Σ ×

Σ

1 0

0 0

p qpq^100

Where p 1 & p 0 are prices of current year & base year respectively.

q 0 = quantity consumed in base year.

Family Budget Method

This method is same as the weighted average of price relative method discussed earlier. The formula is as

follows :

Consumer Price Index = ΣΣPVV

Where P =^10 ×^100

p

p

V = Value weights i.e. p 0 q 0.

Uses of Consumer Price Index Number

(1) It is used to formulate economic policy and also to measure real earning.

(2) It is used to measure purchasing power of the consumer. The formula is as follows—

Purchasing power = ×

(^1100)
ConsumerPriceIndex
(3) It is used in deflating. The process of deflating can be expressed in the form of formula as—
Real wage = ×
MoneyValue 100
ConsumerPriceIndex
(4) It is used in wage negotiations & wage contracts. It also helps to calculate dearness allowance.