Page 273 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

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

Solution: Construction of Cost of Living Index Notes

Group Weights w Group Index I IW
Food 47 247 11,609
Fuel and Lighting 7 293 2,051
Clothing 8 289 2,312
House Rent 13 100 1,300
Miscellaneous 14 236 3,304
∑ W = 89 ∑ IW = 20,576

∑ IW 20,576
Cost of Living Index = = = 231.19.
∑ W 89
Example 7: The data below show the percentage increases in price of a few selected food items
and the weights attached to each of them. Calculate the index number for the food
group.

Food Items Rice Wheat Dal Ghee Oil Spices Milk Fish Vegetables Refreshments
Weight 33 11 8 5 5 3 7 9 9 10

Percentage
increase 180 202 115 212 175 517 260 426 332 279
in price
Using the above food index and the information given below, calculate the cost of
living index number.
Group Food Clothing Fuel & Light Rent & Rates Miscellaneous

Index — 310 220 150 300
Weight 60 5 8 9 18

Solution:
Calculations for Food Index
Food Items Weight Percentage Current Index* IW
W Increase I

Rice 33 180 280 9240
Wheat 11 202 302 3322
Dal 8 115 215 1720
Ghee 5 212 312 1560
Oil 5 175 275 1375
Spaces 3 517 617 1851
Milk 7 260 360 2520
Fish 9 426 526 4734
Vegetables 9 332 432 3888
Refreshments 10 279 379 3790
∑W = 100 ∑IW = 34000

LOVELY PROFESSIONAL UNIVERSITY 267