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Question
Discuss about Cost of Living Index Number
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Solution
Cost of Living Index Number is constructed to study the effect of changes in the price of goods and services of consumers for a current period as compared with the base period.
The change in the cost of living index number between any two periods means the change in income which will be necessary to maintain the same standard of living in both periods.
Therefore the cost of living index number measures the average increase in the cost to maintain the same standard of life.
Further, the consumption habits of people differ widely from class to class (rich, poor, middle class) and even with the region.
The changes in the price level affect the different classes of people, consequently, the general price index numbers fail to reflect the effect of changes in their cost of living in different classes of people.
Therefore, the cost of living index number measures the general price movement of the commodities consumed by different classes of people.
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| Commodity | Price | Quantity | ||
| 2000 | 2010 | 2000 | 2010 | |
| A | 12 | 14 | 18 | 16 |
| B | 15 | 16 | 20 | 15 |
| C | 14 | 15 | 24 | 20 |
| D | 12 | 12 | 29 | 23 |
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|
Index Number is a technique of measuring changes in a variable or group of related variables with reference to time, geographical location and other characteristics. Index Number is very useful for economists, farmers, traders, government, educationalists and trade union leaders for planning and implementing the plans according to their sector. The scope of index number is not limited to only one subject but it extends to many subjects such as Economics, Educational science, Psychology, History, Sociology, Geography etc. While framing index number its objective must be determined. To attain the objective the information is collected in various ways and this information is used for comparing two different time periods. For this purpose, the base year’s index is assumed as 100 and accordingly the value of the current year is calculated. Laspeyre, Paasche and Fisher have suggested different methods for constructing index numbers. |
- Explain the meaning of Index Number.
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- Express your opinion about the given passage.
The base year's index of a selected variable is assumed as ______.
