Page 277 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

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

determining the items to be entered into the consumption pattern of the group and also help in Notes
determining the weights to be assigned to different items. One problem may occur regarding
different qualities of the same type of commodity. Another problem may concern items of common
use which do not occur in both the base period and the given period.
• The consumer price index numbers, also known as cost of living index number, are generally
intended to represent the average change over time in the prices paid by the ultimate consumer
of a specified basket of goods and services. The need for constructing consumer price indices
arises because the general index numbers fail to give an exact idea of the effect of the change in
the general price level on the cost of living of different classes of people, since a given change in
the level of prices affects different classes of people in different manners. Different classes of
people consume different types of commodities and even the same type of commodities are not
consumed in the same proportion by different classes of people.
• The consumer price index numbers were earlier known as cost of living index numbers. But
this name was not a happy one since the cost of living index does not measure the actual cost of
living nor the fluctuations in the cost of living due to causes other than the change in the price
level ; its object is to find out how much the consumers of a particular class have to pay more for
a certain basketful of goods and services in a given period compared to the base period. To
bring out clearly this fact, the Sixth International Conference of Labour Statisticians
recommended that the term ‘cost of living index’ should be replaced in appropriate circumstances
by the terms ‘Price of living index’, ‘cost of living price index’, or ‘consumer price index’. At present,
the three terms, namely, cost of living index, consumer price index and retail price index, are in
use in different countries with practically no difference in their connotation. However, the term
‘consumer price index’ is the most popular of the three.
• The consumer price index numbers were earlier known as cost of living index numbers. But
this name was not a happy one since the cost of living index does not measure the actual cost of
living nor the fluctuations in the cost of living due to causes other than the change in the price
level ; its object is to find out how much the consumers of a particular class have to pay more for
a certain basketful of goods and services in a given period compared to the base period. To
bring out clearly this fact, the Sixth International Conference of Labour Statisticians
recommended that the term ‘cost of living index’ should be replaced in appropriate circumstances
by the terms ‘Price of living index’, ‘cost of living price index’, or ‘consumer price index’. At present,
the three terms, namely, cost of living index, consumer price index and retail price index, are in
use in different countries with practically no difference in their connotation. However, the term
‘consumer price index’ is the most popular of the three.
• 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.
• 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 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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