Consumer Price Index Numbers

CONSUMER PRICE INDEX NUMBERS

Consumer Price Index Numbers are computed with a view of study the effect of changes in prices on the people as consumers. These indices give the average increase in the expenses if it is designed to maintain the standard of living of base year. General index numbers fail to give an indea about 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 price level affects different classes of people differently.

The consumer price indices are of great significance and is given below

1. This is very useful in wage negotiations, wage contracts and dearness allowance adjustments in many countries.

2. At Government level the index numbers are used for wage policy, price policy, rent control, taxation and general economic policies.

3. Change in the purchasing power of money and real income can be measured.

4. Index numbers are also used for analyzing market price for particular kind of goods and services.

Note: Consumer price index numbers are also called as cost of living index numbers.

Methods of constructing consumer price Index 

There are two methods of constructing consumer price index. They are:

1. Aggregate Expenditure method (or) Aggregate method

2. Family Budget method or method of weighted relative method.

1. Aggregate Expenditure method

This method is based upon the Laspeyre’s method. It is widely used. The quantities of commodities consumed by a particular group in the base year are the weight.

Thus, consumer price index number = 

2. Family budget method (or) Method of weight relatives method

This method estimates an aggregate expenditure of an average family on various items and it is weighted. It is given by

consumer price index = 

where

p = p₁/ p₀ × 100 for each item and w = p₀q₀

 The family budget method is the same as “weighted average price relative method” which we have studied earlier.

Example 6.15

Calculate the consumer price index number for 2015 on the basis of 2000 from the following data by using (i) the Aggregate expenditure method (ii) the family budget (or) weighted relatives method.

Solution

(i) Calculation of cost of living index number on the basis of Aggregate expenditure method.

Consumer price index number for 2015

(ii) Calculation of consumer price index number according to family budget method or weighted relative method

Consumer price index number for 2015

≈ 122.6