NIOS Economics (318) Notes/Answer| Chapter-9|Index Numbers (Problem and Uses)

NIOS Economics (318) Notes/Answer| Chapter-9|Index Numbers (Problem and Uses). Important questions for NIOS Economics (318) Questions Answers brings you latest queries and solutions with accordance to the most recent pointers SOS . Students will clear all their doubts with regard to every chapter by active these necessary chapter queries and elaborate explanations that area unit provided by our specialists so as to assist you higher. These queries can facilitate students prepare well for the exams thanks to time constraint . NIOS Economics (318) Notes/Answer| Chapter-9|Index Numbers (Problem and Uses)

HS 2nd years Solutions (English Medium)

NIOS Economics (318) Notes/Answer| Chapter-9|Index Numbers (Problem and Uses)

Intext Questions

1. Fill in the blanks with suitable words out of those given in the brackets:

(a) First of all we should decide what is the ________ of constructing an index number. (weight, formula, purpose, price quotation).

Ans. purpose

(b) Base period should be a period of _________ (normal economic activities, war, flood).

Ans. normal economic activities

(c) While constructing a cost of living index number for industrial workers we should include __________

  1. Food ♦item, refrigerators and television sets
  2. Food item, clothing, fuel and rent
  3. Entertainment, education, VCR and TV sets. Ans. Food item, clothing, fuel and rent

(D) We should take ________ prices in constructing cost of living index numbers. (wholesale. retail). Ans. retail

2. Fill in the blanks using appropriate words from the choices given in brackets:

(a)_______index is a good indicator of inflationary and deflationary tendencies. (Production, Price) 

Ans. Price

(b) Rate of economic growth is measured by________ index number. (per capita, national) 

Ans. national

(c) Rate of economic development is measured by ________ index number. (per capita, national)

Ans. per capita 

(d) Comparing a year with a year different from the base year________ extra calculation. (involves, does not involve)

Ans. involves

Terminal Exercise

1. Explain the problem of selection of base year in constructing an index number.

Ans. Price index number, as we know, is expressed as a price relative. Therefore, we have to choose a suitable reference for comparison. This is called base or reference period.

This base period is the period with which comparisons are made. It may be a year, a month or a day. The choice of base period depends on the objective or purpose of the index number. It should not be a period too distant in the past because with the passage of time some of the old commodities fade in importance and some new commodities appear to satisfy given wants, Also, this period should be a period of normal economic activities. It should not be a period during which any war, earthquake, or any other natural calamities, like floods, droughts and epidemics had taken place.

2. Explain the problem of choice of weights in the construction of an index number.

Ans. Choice of weights is an important problem in the construction of index numbers. From the family budget enquiries again, it will become clear that all goods and services consumed by our group does not occupy the same place or importance. Some goods and services do not force us to spend a greater portion of income. For example, food items in the budget of industrial workers occupy greater importance as in percentage terms, he spends a big proportion of income on it. In contrast he spends a lower percentage on education, entertainment or medicines although items (things) like medicines might be sometimes more important than clothing etc. Therefore, the weights are decided on the basis of the proportion of income spent by the people on each item or group of items/goods. There are various ways of providing weights to different items (or goods). Some prefer to use base year quantities (qo), some current year quantities (q1) and still other use value weights (Poqo). 

3. Explain the problem of choice of average to be used in the construction of an index number.

Ans. Index number is a statistical device with a purpose of showing average changes in one or more related variables over time and space. Now the question arises which average arithmetic mean, mode, median, geometric mean etc. should be used for this purpose. It is held that geometric mean is a better method for averaging. But due to difficulties of calculation, it is rarely used. So most commonly arithmetic means are used. Once this decision has been made, the next problem in this category is whether we shall use simple/unweighted average or weighted average method. For less important studies simple/unweighted average might serve the purpose. But for more accurate studies, it is essential to use a suitable weighted average.

4. Explain some of the uses of the index numbers. Ans. Index numbers are indispensable tools of economics and business analysis. Following are the main uses of index numbers.

  1. Index numbers are economic barometers. Index numbers measure the level of business and economic activities and are therefore helpful in gauging the economic status of the country. Index number is a special type of averages which helps to measure the economic fluctuations on price level, money market, economic cycle like inflation, deflation etc.
  2. Index numbers helps in formulating suitable economic policies and planning etc. Many of the economic and business policies are guided by index numbers. For example, while deciding the increase of DA of the employees; the employers have to depend primarily on the cost of living index. If salaries or wages are not increased according to the cost of living it leads to strikes, lock outs etc. The index numbers provide some guide lines that one can use in making decisions.
  3. Index numbers are used in studying trends and tendencies. Since index numbers are most widely used for measuring changes over a period of time, the time series so formed enable us to study the general trend of the phenomenon under study.
  4. Index numbers are useful in forecasting future economic activity. Index numbers are used not only in studying the past and present workings of our economy but also important in forecasting future economic activity.
  5. Index numbers measure the purchasing power of money. The cost of living index numbers determines whether the real wages are rising or falling or remain constant. The real wages can be obtained by dividing the money wages by the corresponding price index and multiplied by 100. Real wages help us in determining the purchasing power of money.

5. Describe the following index number:

Index number of Wholesale Price in country ‘X’ (Base 1980-81 = 80)

Index number of Wholesale Price In country ‘X’ (Base 1980-81 = 80)

WeightPrimary Article41.67ManufacturedProducts39.87Fuel, power,light and s 8.46All commodities100
12345
1993-94308301509322
1994-95322331559345
1995-96331391609359

Ans. Suppose we come across a certain index number in some newspaper, magazine, a book. Let this be a wholesale price index of country ‘X’ given below Index number of Wholesale Price in country ‘X’ (Base 1980-81=80)

WeightPrimary Article41.67ManufacturedProducts39.87Fuel, power,light and s 8.46All commodities100
12345
1993-94308301509322
1994-95322331559345
1995-96331391609359

Let us see what conclusions we can derive from the above index about the changes in wholesale prices in the country ‘X’. The index classifies all commodities into three groups: 

  1. Primary articles comprising of food grains, non-food articles and minerals.
  2. Manufactured products classified into food products; textiles; chemicals; and chemical products; basic metals, alloys and metal products; and machinery and transport equipment.
  3. Fuel, power, light and lubricants. We can say the following about the above index number: 
  1. The base year is 1993-94 which is taken to be 100. Prices of all other years are expressed as a percentage of this.
  2. It is a weighted index. Different groups of commodities are assigned different weights. Primary articles, manufactured products, fuel etc. are respectively assigned 41.67%, 39.87% and 8.46% weights out of 100.
  3. Index number is prepared on the basis of prices prevailing in the column 1.
  4. Price index of each year indicates the change in the price level in comparison to the price level of 1993-94 only. For example, price index of all commodities (column 5) price level in the year 1994-95 were 345% of the price level in 1993-94 indicating an increase of 23% during a year

Similarly, price level in the year 1995-96 were 359% of the price level in 1993-94 indicating an increase of 37% during 2 year 

  1.  If we want to compare the index of some particular year with the year different from the base year; some more calculations have to be made.

For example, suppose we want to compare price level of primary articles in the year 1995-96 with the year 1994-95. How much percentage is the price level of 1995-96 as compared to the price level of C can be known through calculating a simple percentage in the following manner. Price level of 1995-96 as percent of 1994-95 =(Price Index of 1995-96)/(Price Index of 1994-95)  =331/322 x 100=103%

The conclusion, therefore, is that price level increase by 103%, during a year between 1994-95 and 1995-96 

  1. we can also make commodity, GroupWise comparisons about changes in the price level over different years.

NIOS Class 12th Economics (318) Notes/Question Answer

Chapter Chapters NameLink
Chapter 1Economy and Its ProcessClick Here
Chapter 2Basic Problems of an EconomyClick Here
Chapter 3Economic Development and Indian EconomyClick Here
Chapter 4Statistics: Meaning and ScopeClick Here
Chapter 5Making Statistical Data MeaningfulClick Here
Chapter 6Presentation of Statistical DataClick Here
Chapter 7Statistical MethodsClick Here
Chapter 8Index Numbers (Meanings and Its Construction)Click Here
Chapter 9Index Numbers (Problem and Uses)Click Here
Chapter 10Income FlowsClick Here
Chapter 11National Income: ConceptsClick Here
Chapter 12National Income: MeasurementClick Here
Chapter 13Uses of National Income EstimatesClick Here
Chapter 14What micro EconomicsClick Here
Chapter 15What affects demandClick Here
Chapter 16What affects supplyClick Here
Chapter 17Price determinationClick Here
Chapter 18CostClick Here
Chapter 19RevenueClick Here
Chapter 20Profit maximizationClick Here
Chapter 21Government budgetingClick Here
Chapter 22Money supply and its regulationClick Here
Chapter 23Need for planning in IndiaClick Here
Chapter 24Achievements of planning in IndiaClick Here
Chapter 25Recent economic reforms and the role of planningClick Here

Optical Module – I

Chapter 26AgricultureClick Here
Chapter 27IndustryClick Here
Chapter 28Independence of Agriculture and IndustryClick Here
Chapter 29Transport and CommunicationClick Here
Chapter 30EnergyClick Here
Chapter 31Financial InstitutionsClick Here
Chapter 32Social Infrastructure (Housing, Health and Education)Click Here

Optical Module – II

Chapter 33Direction and composition of India’s Foreign tradeClick Here
Chapter 34Foreign exchange rateClick Here
Chapter 35Balance of trade and balance of paymentsClick Here
Chapter 36Inflow of capital (Foreign Capital and Foreign Aid)Click Here
Chapter 37New trade policy and its implicationsClick Here
Chapter 38Population and economic developmentClick Here
Chapter 39Population of IndiaClick Here

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