Page 266 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics

Notes than in the other. All it means is that as compared with the base periods, prices have risen in one area
than in another. But actual costs depend not only on the rise in prices as compared with the base
period, but also on the actual cost of living for the base period which will vary for different regions
and for different classes of population.
Utility of the Cost of Living Index
The Consumer Price Indices are of great significance as can be seen from the following:
(1) The most common use of these indices is in wage negotiations and wage contracts. Automatic
adjustments of wage or dearness allowance component of wages are governed in many countries
by such indices.
(2) At Governmental level, the index numbers are used for wage policy, price policy, rent control,
taxation and general economic policies.
(3) The index numbers are also used to measure changing purchasing power of the currency, real
income, etc.
(4) Index numbers are also used for analysing markets for particular kinds of goods and services.
Construction of a Consumer Price Index or Cost of Living Index:
The following are the steps in constructing a consumer price index:
(1) Decision about the class of people for whom the index is meant: It is absolutely essential to
decide clearly the class of people for whom the index is meant, i.e., whether it relates to industrial
workers, teachers, officers, etc. The scope of the index must be clearly defined. For example,
when we talk of teachers, we are referring to primary teachers, middle class teachers, etc., or to
all the teachers taken together. Along with the class of people it is also necessary to decide the
geographical area covered by the index. Thus in the example taken above it is to be decided
whether all the teachers living in Delhi are to be included or those living in a particular locality
of Delhi, say, Chandni Chowk or Karol Bagh, etc.

What do you mean by cost of living index?

(2) Conducting family budget enquiry: Once the scope of the index is clearly defined the next
step is to conduct a family budget enquiry covering the population group for whom the index
is to be designed. The object of conducting a family budget enquiry is to determine the amount
that an average family of the group included in the index spends on different items of
consumption. While conducting such an enquiry, therefore, the quantities of commodities
consumed and their prices are taken into account. The consumption pattern can thus be easily
ascertained. It is necessary that the family budget enquiry amongst the class of people to whom
the index series is applicable should be conducted during the base period. The Sixth International
Conference of Labour Statisticians held in Geneva in 1946 suggested that the period of enquiry
of the family budgets and the base periods should be identical as far as possible.
The enquiry is conducted on a random basis. By applying lottery method some families are
selected from the total number and their family budgets are scrutinized in detail. The items on
which the money is spent are classified into certain well accepted groups, namely,
(i) Food (ii) Clothing (iii) Fuel and Lighting
(iv) House Rent (v) Miscellaneous.
Each of these groups is further divided into sub-groups. For example, the broad group ‘food’
may be divided into wheat, rice, pulses, sugar, etc. The commodities included are those which
are generally consumed by people for whom the index is meant. Through family budget enquiry
an average budget is prepared which is the standard budget for that class of people. While
constructing the index only such commodities should be included as are not subject to wide
variations in quality or to wide seasonal alterations in supply and for which regular and
comparable quotations of prices can be obtained.

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