Page 264 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics Pavitar Parkash Singh, Lovely Professional University

Notes Unit 21: Cost of Living Index and Its Uses and

Limitation of Index Numbers

CONTENTS
Objectives
Introduction
21.1 Cost of Living Index and its Uses
21.2 Limitations of Index Number
21.3 Summary
21.4 Key-Words
21.5 Review Questions
21.6 Further Readings

Objectives

After reading this unit students will be able to:
• Explain cost of Living Index and its Uses.
• Describe the Limitation of Index Numbers.
Introduction

One of the main types of index numbers in use is the cost of living index number (CLI). This is also
known as consumer price index number (CPI). Gradually the expression CLI is being replaced by
CPI; it is a special index number of retail prices in which only prices of selected commodities are
considered which enter into the consumption pattern of a particular group of people. Thus different
items enter into the “market basket of goods’’, of different groups. Different groups of people have
different CLI numbers. The market basket of goods includes goods and services needed for maintaining
a certain standard of living for that group over a period of time. The CLI measures changes in the cost
of maintaining the standard of living for that group.
In India CLI numbers are being constructed for three groups of people. These index numbers are
(1) The working class cost of living index numbers
(2) The middle-class cost of living index numbers
(3) The cost of living index numbers of the Central Government employees.

The commodities of selected items for the group constitute what is known as “market
basket of goods” for that group.

We shall describe them later. The basket of goods is divided into five major groups-food, housing,
fuel and light, clothing and other goods and services.
In the U.S.A. a “Consumer Price Index for Urban Wage Earners and Clerical Workers” is constructed
regularly. The commodities are divided into 8 major groups — food, housing, dress, transportation,
medical care, personal care, reading and recreation and other goods and services, The special problems
that arise in the construction of cost of living index numbers for a group lie in determining the
market basket of goods and services needed for a person of the group for maintaining a certain
standard of living. While transport may be an item for city dwellers, this may not be so in the case of
villagers in a developing country.

258 LOVELY PROFESSIONAL UNIVERSITY