Page 269 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Unit 21: Cost of Living Index and Its Uses and Limitations of Index Numbers

C 1 " " 6.00 9.00 9.00 6.00 Notes
D 6 " " 8.00 10.00 60.00 48.00
E 4 Kg. Kg. 2.00 1.50 6.00 8.00
F 1 Qtl. Qtl. 20.00 l5.00 l5.00 20.00

∑ pq ∑ pq
00
10
= 174 = 146.50
∑ pq 174
10
Consumer Price Index = × 100 = × 100 = 118.77
∑ pq 146.5
00
Construction of consumer Price Index Number for 2005 (Base 2004 = 100)
By the Family Budget Method

p
Articles Quantities Unit Price in Price in 1 ×100 pq PV
p 0 00
consumed q 2004 p 2005 p p V
0 0 1
A 6 Qtl. Qtl. 5.75 6.0 104.35 34.5 3,600
B 6 " " 5.00 8.0 160.00 30.0 4,800
C 1" " 6.00 9.0 150.00 6.0 900
D 6 " " 8.00 10.0 125.00 48.0 6,000
E 4 Kg. Kg. 2.00 1.5 75.00 8.0 600
F 1 Qtl. Qtl. 20.00 15.0 75.00 20.0 1,500
∑ V = ∑ PV =
146.5 17,400

∑ PV 17,400
Consumer Price Index = = = 118.77
∑ V 146.5
Thus, the answer is the same by both methods. However, the reader should prefer the
aggregate expenditure method because it is far more easier to apply compared to the
family budget method.
Example 2: An enquiry into the budgets of the middle class families in a city in India gave the
following information:

Expenses on: Food 35% Rent 15% Clothing 20% Fuel 10% Misc. 20%

Price in 2004: 450 90 225 75 120
Price in 2005: 435 90 195 69 135

What change in the cost of living figures of 2005 has taken place as compared to 2004?

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