Comsutmer Price Index Numbers (or Cost of LivingIndex Numbers

(orRetail Price Index Numbers)

The consumer price index numbers are generally intended to
repre-
sent the average change over time in the prices paid by the ultimate
omsumer of a specified basket of goods and services. They measure
changes in the cost of maintaining a certain standard of living from time
to ime. They indicate the effect of change in prices on the consumers.
A change in the level of prices affects different classes of
people in
different manner. Different people consume diferent types of commodi-
ties and even the same types of commodities are consumed in the
not
same proportion by different classes of people. For example, the con-
SuITmption pattern of teachers and that of workers vary widely. Further.
tie
consumption pattern of same class of people varies from place to
piace. The mode of expenditure of teachers in Trivandrum diter torm
at of teachers in The consumption pattern of ditterent
Bangalore.
TIE groups in rural and urban Kerala vary much. The relative impor-
ance of various commodites thus is different in case of ditferent types ot
POple. The Consumer Price Index Numbers helps us in determining the
eflect of rise and fall of prices in different classes of consumerssliving in
effects of rise and fall in hthe
different arcas. In order to measure the
of living ofdifferent classes e
prices of various commodities on the cost
people, separate Index Numbers are constructed tor dilferent groups of

pcople
Steps in the Construction of Consumer Price Index Numbers (Proh
lems in the construction of Cost of Living Index Numbers)
() Decision about (a) class ofpeople (b) scope (c) area: A decision
about the class of people for whom the index is meant, is to be taken
since Index Numbers for teachers, workers etc are differentlyconstructed
Also the scope of Index Number must be clearly defined. Similarly a
decision is to be taken about the geographical area to be covered. For
example, when we consider 'teachers' the term may mean Primary School
teachers to High School teachers belongling to Trivandrum city or
Trivandrum District etc. These points must be clearly defined.
(2) Decision about the items to be selected: All the members in a
particular group do not spend on the various items in the same ratio.
Further the standard of living differ from place to place and group to
group. Therefore the Cost of Living Index Number is constructed fora
particular group of persons in a particular region. So we must include
only those commodities which are generally consumed by the class of
people concerned.
(3) Conducting family budget enquiry: The object of conductinga
family budget enquiry is to determine how much an average family of the
group spends on different items of consumption. While conducting
such an enquiry, the quantities
of commodities consumed and their prices
are taken into account. The
consumptionn pattern can thus be known.
The enquiry is conducted on a random
basis. Some families are
selected at random and their family
on which the
budgets are scrutinised. The items
money spent are classified into (1) food (2)
and lighting (4) house Rent clothing (3) fuel
(5) Miscellaneous. Each of these groups is
further divided into subgroups. For
divided into rice, pulses, oil, example, the group, food may be
sugar etc. The commodities which are
erally consumed by the people for whom the index is gen
included. The commodities whose constructed are
qualities vary widely and whose price
quotations cannot be regularly obtained should not be included.
(4) Obtaining price quotations: In the
Index Number, price quotations have to
construction of Cost of Living
be studied from the point
of the consumers. Consumers of view
from retail shop. The collection
purchase commodities in small quantities
of retail price is very tedious and difficult
 sk Retail prices vary tiom place to place and even at one place from
h to shop and even at one shop from customer to customer. As such,
index number constructed by the use of retail price cannot be used
diferent classes of people at one place. Moreover in the construc-
ian of such Index Numbers it is not possible to exclude such commodi-
ries which are not stable in quality but consumed by people usually.
Afer the quotations have been collected from all retail shops, an average
rie for each of the items included in the index has to be worked out.
Sach averages are first calculated for base year and then for current year.
5 Selecting (a) base period (b) proper weights: A period of com
arative economic stability should be selected as the base period so that
the consumption patterm remains same for a long period. The relative
importance of various items for diferent classes of people is not the
same.Therefore weighting is necessary. The amount spent on each
commodity by an average family constitutes weights of those commodi-
es.

6) Selecting suitable methodsfor Constructing Index: After determin-

ing weights and collecting prices of the commodities. Cost of Living
Index number may be constructed by applying any ofthe following meth
ods.
1. Aggregative Expenditure Method
2 Family Budget Method (or Method of Average Relatives)
Formula:
EPo100
Weighted aggregativemethod:Podx 100
Family budget method:
Ex.21: Construct the cost of living index number from the following
Group: A B C D E
Index 350 200 240 150 250
Weight: 5 2 3 1 2
Ans: IV
Hint:
Here appropriate formula is
Commodities Index No. (U Weight (V) TV
A 350 1750
B 200 2 400
240 3 720
D 150 150
E 250 2 500
13 3520
 2IV
Cost of living index number V - 3520
13 270.11
F. 22: An enquiry into the budgets ofmiddleclass families i
drum eity gave the following information.
n
Trivan-
Eypenses on Fod Rent Clothing Fuel
35% 15 20% 10%
Misc.
20%
Price (2006): 150 30 75 25 40
Price (2008): 145 30 65 23 45
What changes in the cost ofliving of2008 as compared with 2006
areseen?
Ans:

Expenses Weight (V) (Po) (P) x 100

Food 35 150 145 96.67 3383.45
Rent 15 30 30 100.00 1500.00
Clothing 20 75 65 86.67 1733.40
Fuel 10 25 23 92.00 920.00
Misc. 20 40 45 112.50 2250.00
100 9786.85
Cost of Living Index Number = XV9786.85
100
=97.87 =97.87

The cost ofliving has decrease by 2. 13%

Ex. 23: In calculating a certain Cost ofLiving Index Number the follow
ing weights were used. Food 15, Clothing 3, Rent 4, Fuel and light 2,
Miscellaneous 1. Claculate the index for a data when the average per.
centages increase in prices of items in the various groups over the
period were 32, 54, 47, 47 and 78 respectively.

Ans: Hint: I=100+ percentageincrease

Group Average % Groupindex Weight
increasein price (
Food 32 132 15 1980

Clothing 54 154 462

Rent 47 147 S88
Fuel&light 78 178 356
Miscellancous 58 158 158
25 3544

Cost of Living Index Number=y= *3544 = 141.76

25
 The
Ex. 24: The following table gives the group Index numbers and the
Ex.2
veightsof diferent
d heads of expenditure in the
wWeignng Index except the index for the group'Fuelcalculation
and
of a Cost of
Lighting'.
GrOup
Index Weight
221 35
Foxd
Clothing
198 14
Fuel&Lighting ? 15
183 8
Rent
Miscellaneous 161 20
Ifthe Costof Living Index is 193, find the Index Number of fuel and
Lighting group.
Ans: Take the
index of fuel as 'x'. .

Group Index Weight

21 35 7735
Food
Clothing 198 14 2712
X 15 15x
Fuel&lighting
183 8 1464
Rent
Miscellaneous 161 20 3220
92 15191+15x

Cost of Living Index Number

=
=1 92
5 =
193
. 15x=17756-15191=2565
15191 +15x=193x 92

. X= 256
15
171
Hence the Index Number of fuel and light group =171
show the percentage increase in price ofa few
Ex. 25: The data below
each ofthem. Calculate
Selected food items andthe weights attached to
the Index Number ofthe group. Dhal Ghee Oil
Rice Wheat
Food items 5 5
33 11
Weight 180 202
115 212 175
Percentage increase in price: Refreshment
Fish Vegetables
Spices Milk 10
9 9
3 7 279
426 332 the
517 260 below calculate
information given
Jsing the above food index and the
Cost of Living Index Number. Rent & Rate Misc.
Lighting
Group Food Clothing Fuel & 150 300
Index. 310 220 18
9
8
Weight 60 5
Ans:
 FoodIndex
Percentage Current V
Food items Weight
(V
increase index(0
180 280
Rice
33
302
9240
202 3322
Wheat 115 215
Dhal
IT20
212 312 I560
Ghee 175 275
Oil
1375
517 617 1851
Spices 260 360 2520
Milk 526
426 4734
Fish
9 332 432 3888
Vegetables
10 279 379 3790
Refreshment
100 34000
Food index = 340
Cost of livingindex
Group Index () Weight(V)|
Food 340 60 20400
Clothing 310 5 1550
Fuel and Light 220 8 1760
Rentand Rates 150 9 1350
Miscellaneous 300 18 5400
100 30460
Cost of living index EIV30460 304.6
Utility of Consumer Price Index Numbers.
The most important use of these Index Numbers is for wage
nego
tiations and wage contracts.
2 At Government level, the Index Numbers are used
for Wage Policy.
Price control, rent control,
3.
taxation etc.
These Index Numbers are also used for
measuring changing pur
chasing power of currency.
4. They are also used for analysing markets for
and services. particular kind of goou
5. They are used for estimating the real
wages of the workers from u
wages paid to them.
Precautions while using Consumer
Price Index
sumer
Following factors are to be born in mind while
construeils
Con
Price Index Number.
1
Consumer Price ndex measures changes in the retail prices only in
the given period compared to the base period.
Consumption pattem also changes from time to time.
Oualitics of goods consumed also change.