Page 251 - DMGT404 RESEARCH_METHODOLOGY

Unit 11: Index Numbers

Self Assessment Notes
Fill in the blanks:

9. …………………………..measures the change in quantities in current year as compared
with a base year.
10. The formulae for quantity index numbers can be directly written from
…………………….simply by interchanging the role of price and quantity.

11.6 Consumer Price Index Number

The consumer price or the retail price is the price at which the ultimate consumer purchases his
goods and services from the retailer. According to the Labour Bureau, “with the help of Consumer
Price Index Number, it is intended to show over time the average change in prices paid by the consumers
belonging to the population group proposed to be covered by the index for a fixed list of goods and services
consumed by them”.
Formerly, this index was also known as the cost of living index. However, since this index
measures changes in cost of living due to changes in retail prices only and not due to changes in
living standards, etc., the name was changed to consumer price index or retail price index.
11.6.1 Construction of Consumer Price Index

The following steps are involved in the construction of a consumer price index:
1. Scope and Coverage: The scope of consumer price index, proposed to be constructed, must
be very clearly defined. This implies the identification of the class of people for whom the
index will be constructed such as industrial workers, agricultural workers, urban wage
earners, etc. Further, it is also necessary to define the coverage of the class of people, i.e.,
the definition of geographical location of their stay such as a city or two or more villages,
etc. The selected class of people should form a homogeneous group so that weights of
various commodities are same for all the people.
2. Selection of Base Period: A normal period having comparative economic stability should
be selected as a base period in order that the consumption pattern used in the construction
of the index remain practically stable over a fairly long period.
3. Conducting Family Budget Enquiry: A family budget gives the details of expenditure
incurred by the family on various items in a given period. In order to estimate the
consumption pattern, a sample survey of family budgets of the group of people, for whom
the index is to be constructed, is conducted and from this an average family budget is
prepared. The goods and services that are to be included in the construction of the index
are selected from this average family budget. Efforts should be made to include as many
commodities as possible. Generally the commodities are divided into five broad groups:
(i) Food, (ii) Clothing, (iii) Fuel and Lighting, (iv) House Rent and (v) Miscellaneous.
If necessary, these groups may further be divided into sub-groups. Percentage expenditure
of a group is taken as its weight.
4. Obtaining Price Quotations: The next step in the construction of consumer price index is
to obtain the retail price quotations of various items that are selected. The price quotations
should be obtained from those markets from which the group of people, for whom the
index number is being constructed, normally make purchases. The quality of various
goods and services used by the group of people should also be kept in mind while obtaining
price quotations.

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