Price Indices and Their Uses
NCERT Class 11 • Statistics for Economics • Chapter "Index Numbers"
Price Indices and Their Uses
An index number is a statistical device that measures the change in a group of related variables over time, expressed against a base taken as one hundred. Price indices are the most used type, because they tell us how much the general price level has moved compared with a chosen base year.
Constructing an Index
- A base year is chosen that was normal, that is free from war, famine, drought or unusual price swings.
- The base year value is always set at 100, and every other year is compared with it.
- A basket of representative items is selected, since it is impossible to include every good.
- Each item is given a weight according to its importance in total spending.
- An index above 100 means prices have risen since the base year; below 100 means they have fallen.
- If the index is 130, the price level is 30 per cent above the base year level.
- The base year is revised periodically, because consumption patterns change over time.
Main Indices and Their Uses
- The wholesale price index measures price change in bulk transactions between traders and does not cover services.
- The consumer price index measures retail price change for a household basket, with separate series for different groups of consumers.
- The index of industrial production measures output change in mining, manufacturing and electricity.
- Agricultural production index and human development index apply the same idea to other fields.
- Indices are used to fix dearness allowance, to revise wages and pensions, and to judge whether real income has risen.
- They also guide monetary policy, since a central bank watches the consumer index closely.
| Index | What It Measures | Coverage |
|---|---|---|
| Wholesale price index | Bulk trade prices | Goods only |
| Consumer price index | Retail prices for households | Goods and services |
| Index of industrial production | Output of industry | Mining, manufacturing, electricity |
Base year — a normal reference year whose value is set at 100 and against which other years are compared.
Hindi me samjhein
आधार वर्ष का मान सदैव 100 रखा जाता है। यदि सूचकांक 130 है, तो कीमत स्तर आधार वर्ष से 30 प्रतिशत ऊपर है। आधार वर्ष सामान्य होना चाहिए, यानी युद्ध या अकाल वाला नहीं।
Exam me kaise aata hai
- The base year index value is always — 100
- Retail household prices are measured by — the consumer price index
- Bulk trade prices are measured by — the wholesale price index
- Dearness allowance is fixed using — a price index
UPSC/State PSC ke liye
- The wholesale index excludes services, so in a service heavy economy it can diverge sharply from the consumer index.
- Weights matter more than the item list, since a small weight item's price change barely moves the index however dramatic it looks.
Yahan confuse hote hain
✗ The base year value can be any number | It is always set at 100 | ✓
✗ WPI and CPI always move together | They can diverge, since coverage and weights differ | ✓
✗ An index of 130 means prices are 130 per cent higher | It means prices are 30 per cent above the base year | ✓
Ek nazar me
- An index number measures change against a base year set at 100.
- A normal base year and correct weights are essential.
- WPI covers bulk goods; CPI covers the household retail basket.
- Indices fix dearness allowance and guide monetary policy.