Index Numbers – Class 11 Economics notes, important questions and MCQs

Chapter overview

An index number is a statistical device that measures changes in a group of related variables over time or between places, compared with a base period whose value is taken as 100. Price indices such as the Consumer Price Index and Wholesale Price Index measure inflation, while other indices track industrial production and share prices.

Meaning and construction

• The base year is the reference year, with index = 100; the current year is compared with it.
• Simple aggregative price index = (Σp1 ÷ Σp0) × 100, where p0 and p1 are base and current year prices.
• A weighted index gives more importance to more important items.
• Laspeyres' index uses base-year quantities as weights; Paasche's index uses current-year quantities.

Important indices in India

• Consumer Price Index (CPI) measures changes in retail prices paid by consumers; it is used to measure inflation and revise dearness allowance.
• Wholesale Price Index (WPI) measures changes in wholesale prices of goods.
• Index of Industrial Production (IIP) measures changes in the volume of industrial output.
• The BSE Sensex is an index of share prices with base 1978–79 = 100.

Uses and limits

• Index numbers measure inflation, help in wage fixing and policy, and allow comparison over time.
• An index may be misleading if the base year is unsuitable, items or weights are outdated, or data are poor.

Key terms

Index number

a statistical measure showing relative change in a group of variables compared with a base period

Base year

the reference year whose index value is taken as 100

Consumer Price Index

an index measuring changes in retail prices of goods and services bought by consumers

Inflation

a sustained rise in the general price level

Weighted index

an index in which items are given importance according to their significance

Important questions with answers

Quick revision

• Base year index = 100.
• Simple aggregative: Σp1 ÷ Σp0 × 100.
• CPI, WPI, IIP, Sensex.
• Uses: inflation, wages, policy.

Exam tips

• Always write the formula, then show Σp1 and Σp0 before dividing.
• Remember Laspeyres = base-year quantities; Paasche = current-year quantities.

Practice MCQs

1. The index value of the base year is

   1. 0
   2. 1
   3. 100
   4. 1,000
   Show answer

   Answer: (c) 100. Other years are compared with it.

2. Which index measures changes in retail prices paid by consumers

   1. WPI
   2. IIP
   3. CPI
   4. Sensex
   Show answer

   Answer: (c) CPI. It is used for dearness allowance.

3. The Sensex is an index of

   1. share prices
   2. industrial production
   3. wholesale prices
   4. rainfall
   Show answer

   Answer: (a) share prices. It is of the Bombay Stock Exchange.

4. If Σp0 = 200 and Σp1 = 250, the simple aggregative price index is

   1. 80
   2. 125
   3. 150
   4. 250
   Show answer

   Answer: (b) 125. 250 ÷ 200 × 100 = 125.

5. Laspeyres' price index uses as weights the

   1. current-year quantities
   2. number of items
   3. average prices
   4. base-year quantities
   Show answer

   Answer: (d) base-year quantities. Paasche uses current-year quantities.

6. The Index of Industrial Production measures changes in

   1. prices of goods
   2. exports only
   3. wages
   4. the volume of industrial output
   Show answer

   Answer: (d) the volume of industrial output. It is a quantity index.

7. A CPI of 150 in the current year (base = 100) means prices have

   1. fallen by 50 per cent
   2. risen by 150 per cent
   3. risen by 50 per cent
   4. remained the same
   Show answer

   Answer: (c) risen by 50 per cent. 150 − 100 = 50 per cent rise.

8. Why are weighted index numbers preferred to simple ones

   1. they are easier to compute
   2. they need no base year
   3. they ignore prices
   4. they give more importance to more important items
   Show answer

   Answer: (d) they give more importance to more important items. Rice matters more than salt in a budget.