RBSE Class 11 Economics Notes Chapter 8 Index Numbers

These comprehensive RBSE Class 11 Economics Notes Chapter 8 Index Numbers will give a brief overview of all the concepts.

RBSE Class 11 Economics Chapter 8 Notes Index Numbers

Index Numbers:

• Index number is a statistical tool for measuring change in variable or a group of related variables over two different situations.
• Index numbers are expressed in terms of percentage.
• Base period is the period with which the comparison is to be made.
• Price index numbers measure and facilitate comparison of the prices of certain goods.
• Quantity index numbers measure the changes in the physical volume of production, construction or employment.
• A production index is an important indicator of the output level in the economy.

Methods of Constructing Index Numbers
Aggregative Method
Simple aggregative price index:
P₀₁ = \(\frac{\sum P_1}{\sum P_0}\) × 100

Weighted Aggregative Method

• Laspeyres price index - uses base period quantities as weights
  P₀₁ = \(\frac{\sum P_1 q_0}{\sum P_0 q_0}\) × 100
• Paasche price index - uses current period quantities as weights
  P₀₁ = \(\frac{\sum P_1 q_1}{\sum P_0 q_1}\) × 100

Averaging Price Relatives Method
This method takes the average of price relatives of many commodities.
P₀₁ = \(\frac{1}{N} \sum \frac{P_1}{P_0}\) × 100

Weighted Index of Price Relatives Method
P₀₁ = \(\frac{\sum W\left(\frac{P_1}{P_0} \times 100\right)}{\sum W}\) × 100
= \(\frac{\sum \mathrm{WR}}{\Sigma W}\), where R = \(\frac{P_1}{P_0}\) × 100

Important Index Numbers
Consumer Price Index (CPI) measures the average change in prices paid by the specific class of consumers for goods and services consumed by them in the current year in comparison with base year. It can be measured by using the formula:

Aggregative expenditure method:
CPI = \(\frac{\sum P_1 q_0}{\sum P_0 q_0}\) × 100

Family buget method:
CPI = \(\frac{\sum \mathrm{WR}}{\Sigma W}; \) where R =\( \frac{P_1}{P_0}\) × 100

Wholesale Price Index (WPI):

• Wholesale Price Index (WPI) indicates the change in the general price level.
• Index number of Industrial Production (IIP) measures the relative increase or decrease in the level of industrial output in a country in comparison to the level of production in the base year. It can be measured by using the formula:
  IIP₀₁ = \(\frac{\sum W\left(\frac{q_1}{q_0} \times 100\right)}{\sum W}\)
• Index number of agricultural production measures the relative increase or decrease in the level of agricultural output in a country in comparison to the level of production in the base year.

Index Number in Economics
Uses of Consumer Price Index (CPI)

• Negotiation of wages
• Formulation of policies related to income, price, rent control, taxation and other general economic issues
• Calculation of purchasing power of money
• Purchasing Power of Money = \(\frac{1}{\text { Cost of Living Index }}\)
• Calculation of real wage
  Real Wage = \(\frac{\text { Money Wage }}{\text { Cost of Living Index }}\) × 100

Uses of Wholesale Price Index (WPI):

• Elimination of the effect of price change on national level aggregates such as national income, capital formation, etc.
• Measurement of the rate of inflation

Inflation:
Inflation refers to a situation of rise in the general price level in a country over a fairly long period of time.
Rate of Inflation (ROI) = \(\frac{X_t-X_{t-1}}{X_{t-1}}\) × 100

Index of industrial and agricultural production gives a quantitative figure about the change in production and performance in the respective sectors.

Sources of Index Numbers

• Economic Survey
• Annual publication of the Government of India on various indices WPI, CPI, Index Number of Yield of Principal Crops, Index of Industrial Production, Index of Foreign Trade.