What went wrong when the king rode under the arch?

It was too low and knocked off his crown

How does the chain of blame unfold in the poem?

Each accused person blames another, ending with the king's own changes

What is meant by the base period?

The base period is the period of comparison; its value is assigned the index number 100, and changes in other periods are measured relative to it.

Distinguish between a price index and a quantity index.

A price index measures the average change in prices of goods, while a quantity or volume index measures the change in their physical volume of production or consumption.

Write the formula for a simple aggregative price index.

\(P_{01}=\dfrac{\sum P_1}{\sum P_0}\times100\); its limitation is that every item receives equal weight regardless of importance.

Distinguish between Laspeyre's and Paasche's price index.

Laspeyre's index weights prices by base-period quantities, \(\dfrac{\sum P_1 q_0}{\sum P_0 q_0}\times100\), while Paasche's uses current-period quantities, \(\dfrac{\sum P_1 q_1}{\sum P_0 q_1}\times100\); they differ only in the weights.

What is the Consumer Price Index?

The CPI, or cost-of-living index, measures the average change in the retail prices of a fixed basket of goods consumed by a particular group such as industrial workers.

What is the Wholesale Price Index and headline inflation?

The WPI reflects the general price level of goods (excluding services); the inflation rate based on the all-commodities WPI is called headline inflation, while core inflation excludes food and fuel.

The Sensex is the Bombay Stock Exchange's sensitive index, a benchmark of 30 representative stocks whose movement signals investor optimism or pessimism.

How are purchasing power of money and real wage found?

Purchasing power of money is the reciprocal of the cost-of-living index, while the real wage equals the money wage divided by the cost-of-living index, multiplied by 100.

What issues arise in the construction of an index number?

One must be clear about the purpose, select representative items, choose a normal base year (avoiding abnormal or very distant years), pick the right formula and use reliable data sources.

Index Numbers

Q: What is an index number?

An index number is a statistical device that measures the average change in the magnitude of a group of related variables between two situations, expressed as a percentage of a base value of 100.

Class 11 Economics · Statistics for Economics · Chapter 7

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Summary

An index number is a statistical device for measuring the average change in the magnitude of a group of related variables over two situations, usually expressed as a percentage of a base period whose value is taken as 100. An index of 250 means values are two-and-a-half times those of the base year. Index numbers measure changes in prices (price index) or in physical volume (quantity index). They are constructed by the aggregative method or the method of averaging relatives, and may be unweighted or weighted. A simple aggregative price index is \(P_{01}=\dfrac{\sum P_1}{\sum P_0}\times100\), but giving every item equal weight is its main limitation. Laspeyre's index uses base-period quantities as weights, \(\dfrac{\sum P_1 q_0}{\sum P_0 q_0}\times100\), while Paasche's index uses current-period quantities, \(\dfrac{\sum P_1 q_1}{\sum P_0 q_1}\times100\); they differ only in the weights chosen. Important official indices include the Consumer Price Index or cost-of-living index, which tracks retail prices for a group such as industrial workers; the Wholesale Price Index, which reflects the general price level of goods and underlies "headline" inflation; and the Index of Industrial Production, a quantity index. The Sensex is the Bombay Stock Exchange's sensitive index of 30 stocks. Index numbers help compute the purchasing power of money (the reciprocal of the cost-of-living index) and real wages (money wage divided by the cost-of-living index, times 100). Choosing a normal base year, representative items and the right formula are key issues in construction.

Index Numbers

Key terms

Index number

A statistical device measuring the average change in a group of related variables over time, expressed relative to a base of 100.

Base period

The reference period of comparison whose index value is taken as 100.

Laspeyre's index

A weighted price index using base-period quantities as weights, \(\dfrac{\sum P_1 q_0}{\sum P_0 q_0}\times100\).

Paasche's index

A weighted price index using current-period quantities as weights, \(\dfrac{\sum P_1 q_1}{\sum P_0 q_1}\times100\).

Consumer Price Index

A cost-of-living index measuring the average change in retail prices of goods bought by a particular group.

Wholesale Price Index

An index reflecting the general price level of goods, used to measure headline inflation.

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An index number measures the average change in a group of related variables, usually expressed as a:

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Index Numbers

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