Page 276 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics

Notes formula is adopted over a period of time for constructing a particular index. There is no index
number method which is most satisfactory from all the various points of view which may
logically or practically be taken. Index numbers are averages, and all averages are basically
compromises between opposing extremes or forces.
5. Just like other statistical tools, index numbers can also be manipulated in such a manner as to
draw the desired conclusions. Choosing a freak year is a favourite trick of those who use statistics
to mislead. A dishonest capitalist could choose a record year of profits as base and so “prove”
subsequent profits to be pitifully low. Similarly, in order to prove that the current prices are
intolerably high a dishonest trade unionist may choose a year of exceptionally low prices as base.
6. Since in the construction of index numbers a large number of factual questions are involved,
lack of adequate and accurate data in most cases becomes a serious limitation of the index itself.
In most of the cases one cannot collect the data himself and, therefore, one has to rely on a
published source. Ordinarily, we draw upon many sources of data which are geographically
dispersed. Problems of comparability and reliability thus multiply and the chances of spurious
results are increased. One mistake may “bias” the index such as including the price of one
commodity for one time period, or the price of a slightly different commodity for another period,
or taking the manufacturer’s price at one time and wholesaler’s or retailer’s price another time.
7. Comparisons over long periods are not reliable.
Self-Assessment

1. Fill in the blanks:
(i) Theoretically the best average in the cost of living index numbers is ...............
...............
(ii) Cost of living index = × 100 .
∑ pq
00
(iii) Kelly’s method of constructing index involves the formula P = ............... where q = ............... .
01
(iv) Cost of living index help in determaining ............... wages.
(v) Cost of living index help in determing the purchasing power of ............... .
21.3 Summary

• 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. The commodities of selected items for the group constitute what is known as “market
basket of goods” for that group. 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 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.
• To determine the weights, a proper study of consumption habits of persons of that group is to
be made. The usual procedure is to conduct “family budget surveys”. Such surveys help in

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