Page 252 - DMGT404 RESEARCH_METHODOLOGY

Research Methodology

Notes 5. Computation of the Index Number: After the collection of necessary data, the consumer
price index can be computed by using either of the following formulae.
(a) Aggregate Expenditure Method: Base year quantities are taken as weights in the
aggregate expenditure method. The formula for the consumer price index is given
å p p
by p CP = 1 0 ´ 100 which is the Laspeyres’s formula.
å p p
01
0 0
(b) Family Budget Method: This method is also known as weighted average of price
relatives method and accordingly values are taken as weights. The formula for the
å Pw p 1
consumer price index is given by P CP = , where p = ´ 100
01
å w p 0
Example: From the information given below, construct the consumer price index number
of 1985 by (i) Aggregate Expenditure Method, and (ii) Family Budget Method.

Commodities Quantities (q 0 ) Price in 1980 (p ) Price in 1985 (p )
0
1
A 2 75 125
B 25 12 16
C 10 12 16
D 5 10 15
E 25 4.5 5
F 40 10 12
G 1 25 40

Solution:
Calculation of Consumer Price Index

Com . p q p q P = p 0 1 ´ 100 w = p q Pw
0 0
0 0
1 0
p
A 150 250 166.67 150 25000.5
B 300 400 133.33 300 39999.0
C 120 160 133.33 120 15999.6
D 50 75 150.00 50 7500.0
E 112.5 125 111.11 112.5 12499.9
F 400 480 120.00 400 48000.0
G 25 40 160.00 25 4000.0
Total 1157.5 1530 1157.5 152999.0

1530
1. Index by agg. exp. method  100  132.18
1157.5
152999
2. Index by F.B. method  132.18
1157.5

11.6.2 Uses of Consumer Price Index

1. A consumer price index is used to determine the real wages from money wages and the
purchasing power of money.

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