Practice Questions
Define the term 'index number'.
Name the two periods involved in the comparison for an index number.
Justify why a rising Sensex is often interpreted as a sign of a healthy economy.
Critique the Simple Aggregative Method for constructing a price index. Why is it considered of limited use in real-world economic analysis?
Propose one compelling reason for periodically updating the base year of an index number like the CPI.
Analyze the statement: 'The Consumer Price Index for 2022 with base year 2012 is 180.'
Apply the concept of index numbers to calculate the inflation rate if the Wholesale Price Index (WPI) for week 1 was 140 and for week 2 was 142.8.
Demonstrate the calculation of purchasing power of money if the CPI is 250.
Calculate the simple aggregative price index for the following data, with 2010 as the base year, and analyze the result.
Justify the need for a 'normal' year when selecting a base period for an index number.
Recall the full form of WPI and IIP.
The CPI in 2015 was 120 (Base Year=2010). By 2020, the CPI had risen to 150. Formulate a conclusion about the change in the purchasing power of money between 2015 and 2020. Show your calculation.
Name the price index that uses current period quantities as weights.
Critique the Index of Industrial Production (IIP) as a comprehensive measure of a country's economic output. What are its main limitations?
Design a weighted price index for a family's monthly 'entertainment' budget. Select four relevant items, assign logical weights based on expenditure, and provide hypothetical base and current period prices. Create a table, calculate the final index using the weighted average of price relatives method, and interpret the result.
Calculate Laspeyre's price index from the following data and analyze its meaning.
Contrast the Consumer Price Index (CPI) with the Index of Industrial Production (IIP).
Explain the difference between a simple index number and a weighted index number.
Describe the purpose of the Consumer Price Index (CPI).
What is a 'price relative'?
List three desirable properties of a base period.
Explain the difference between a price index and a quantity index.
Identify the main difference between Laspeyre's and Paasche's price index formulae.
Examine the primary limitation of a simple aggregative price index and demonstrate how a weighted index addresses this issue.
Compare and contrast Laspeyre's Price Index and Paasche's Price Index with respect to the weights used.
Analyze why the base year of an index number is frequently updated.
A person's salary in the base year was Rs 8,000. To maintain the same standard of living in the current year, their salary should be Rs 32,000. Calculate the Consumer Price Index for the current year.
Examine the role of the Sensex as an economic index.
Evaluate the use of the Wholesale Price Index (WPI) versus the Consumer Price Index (CPI) as the primary measure of inflation for a country's central bank. Which is more suitable for monetary policy decisions and why?
Create a hypothetical scenario where an employee receives a 10 percent salary increase but is still financially worse off. Use index numbers to justify your conclusion.
Evaluate the appropriateness of using a single national CPI to adjust the wages of government employees in both a major metropolitan city and a remote rural area.
Critique the practical feasibility of constructing Paasche's index on an annual basis.
Solve for the real wage of a worker who earns Rs 15,000 per month when the Consumer Price Index is 300 (base year = 100).
Summarize five important uses of index numbers in economics.
Describe the Wholesale Price Index (WPI) and the Index of Industrial Production (IIP).
Explain how 'real wage' is calculated using an index number.
Analyze why different Consumer Price Indices are constructed for different consumer groups, such as industrial workers and agricultural laborers.
Evaluate the statement: "Laspeyre's price index tends to overstate inflation, while Paasche's price index tends to understate it." Justify your reasoning with reference to the weighting systems used in both formulas.
Explain the two main methods for constructing an index number: the aggregative method and the method of averaging relatives.
Calculate the weighted price index using the weighted average of price relatives method from the data below and interpret the result.
Summarize the key issues that must be considered during the construction of an index number.
Examine why the selection of items is a critical issue in the construction of a Consumer Price Index.
Propose a design for a new Consumer Price Index for University Students (CPI-US). Identify three major expenditure groups, justify their inclusion and assign hypothetical weights, and explain why a general CPI would be inadequate for this group.
You are an economic advisor. The latest CPI data shows a 5 percent increase, driven primarily by a 15 percent rise in the 'Food and Beverages' group, which has a 45 percent weight in the index. Formulate a policy recommendation for the government to address this situation, justifying why your approach is targeted and effective.
A trade union is negotiating for a Cost of Living Allowance (COLA). Management proposed using a Paasche's Price Index, while the union insists on a Laspeyre's Price Index. Justify the union's preference and evaluate which index would likely result in a higher wage adjustment.