Allah is kind

Syl:-7:Index Number :-Understanding index number-type of

index number-characteristics and uses index number-
Methods for construction of Price indexes-unweighted price
indexes-weighted price indexes-Quantity or Volume indexes-
Value indexes-Tests of Adequacy of indexes chainindex-
Consumer Price indexes.
Formula:
Total price of the current year
(i)Price index number = × 100
Total price of the base year

 p1
P01= × 100
 p0

Total quantity for the current year

(ii)Quantity index number, = × 100
Total quantity for the base year

 q1
Q01= × 100
 q0

 p1q0
(iii)Laspeyers Index: P 01= × 100
 p0 q0

 p1 q1
(iv)Paasche’s Index: P 01= × 100
 p0 q1

 p1q0  p1q1
(v)Fisher’s Ideal Index P 01=   100
 p0 q0  p0 q1

Mizan sir:- 01911-971203

Index number:-An index number may be described as a specialized average designed to
measure the change in the level of a phenomenon with respect to time, geographic
location or other characteristics such as income, etc. Thus, when we say that the index
number of wholesale prices is 125 for the period January 2013 compared to January 2012
it means there is net increase in the prices of wholesale commodities to the extent of 25
percent. Or
A ratio that measures how much a variable changes over time is called index number.
Types of Index Number: There are many types of index numbers , In economics and
business widely used four types are:- (a) Price Index (b) Quantity Index (c) Value Index
and (d)Special purpose.
(a)Price Index: The price index measures the relative change in the retail or wholesale
price level of any particular commodity or a group of commodities. The retail price index
helps us to know the changes the retail prices of commodities, bank deposits,
consumption goods etc.
Price index for the current year with respect to the base year,
Total price of the current year
Price index number = × 100
Total price of the base year
 p1
P01= × 100
 p0
Where, po= Price of the base year
P 1 = Price of the current year
(b) Quantity Index: The quantity index measures the relative change in the quality of
industrial or agricultural products, import or export and so on.
Total quantity for the current year
Quantity index number, = × 100
Total quantity for the base year
 q1
Q01= × 100
 q0
Where, qo= Quantity of the base period
q 1 = Quantity of the current period

Characteristics of a good Index Number:

A good Index Number should have the following properties:
(i)It is suitable for comparing the changes in variables which are in different units.
ii) An index number should be expressed in terms of percentage although the sign (%)
should not be used.
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iii) It should be able to compare the relative variations.
iv) It should have the quality to compare the relative changes that take place overtime,
location or other characteristics.

Importance and uses of Index Number:

Now a day index numbers are very widely used. Particularly, they are useful in
measuring relative changes. The uses of index numbers are discussed below in brief:
(i)To measures relative change: index numbers are used to get some better idea of relative
changes in price, production, employment etc.
(ii) To study variation: the index numbers throw light on the nature of variation in general
economic and business activity of a country.
(iii) For efficient planning: They are useful in any organization for efficient planning and
formulation of executive decision.
(iv) To adjust weight: In various fields of economy, the process of wage adjustment is
done through consumer’s price index.
(v) To compare the standard of living: Index numbers are suitable measures for knowing
the cost of living index. And comparing the cost of living index in different communities,
we can easily compare their standard of living.

Limitations of Index Number:

Even though index numbers are very important in business and economic activities, they
have their own limitations; they are:
1. There may be error in each stage of the construction of the index number, namely,
selection of commodities, selection of the base period, selection of weight, etc.
2. Index numbers may not represent the exact change in price level, because they are
based on sample data.
3. Tastes, habits and customs of people change in course of time and may make the
weighting not suitable for the present data.
4. In each index there is an index error, because there is no formula for measuring the
price change. So there is the formula error. Hence it will not be a representative one.
5. By selecting a suitable year as the base year, selfish persons may get their desired
results.
Index numbers, properly constructed, will be useful as economic barometer.
Q (2008):- What is Fisher’s ideal? Why is it called ideal?

Mizan sir:- 01911-971203

=) Prof. Irving Fisher has given a number of formulae for constructing index number and
of these he calls one as the ideal index. The Fisher’s Ideal Index is given by the formula:
 p1q0  p1q1
P01=   100 or
 p0 q0  p0 q1
P01 = L  P
The above formula is known as ‘Ideal’ because of the following reasons:-
(i). It is the best average, i.e, geometric mean is used for computation.
(ii) It is based on the current year as well as the base year.
(iii) It satisfies both the time reversal test as well as the factor reversal test as suggested
by Fisher.
(iv)The upward bias of Laspeyre’s index and downward bias of Paasche’s index are
balanced to a great extent in this test.

Q (2009):- What is index number? Examine the various problems involved in the
construction of an index number.
=) Index number:-An index number may be described as a specialized average designed
to measure the change in the level of a phenomenon with respect to time, geographic
location or other characteristics such as income, etc. Thus, when we say that the index
number of wholesale prices is 125 for the period January 2013 compared to January 2012
it means there is net increase in the prices of wholesale commodities to the extent of 25
percent. Or
A ratio that measures how much a variable changes over time is called index number.
On the way of constructing an index number, the important problems are (i) Purpose of
index Numbers (ii) Collection of Data (iii) Selection of commodities (iv) Selection of
base year (v) Choice of an average (vi) selection of appropriate weights (vii) selection of
appropriate formula.
Q (2011):- What is Fisher’s Ideal Index? Why is it called ideal? Show that it satisfies
both the time reversal test as well as the factor reversal test.
=) Prof. Irving Fisher has given a number of formulae for constructing index number and
of these he calls one as the ideal index. The Fisher’s Ideal Index is given by the formula:
 p1q0  p1q1
P01=   100 or
 p0 q0  p0 q1
P01 = L  P
The above formula is known as ‘Ideal’ because of the following reasons:-
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(i). It is the best average, i.e, geometric mean is used for computation.
(ii) It is based on the current year as well as the base year.
(iii) It satisfies both the time reversal test as well as the factor reversal test as suggested
by Fisher.
(iv)The upward bias of Laspeyre’s index and downward bias of Paasche’s index are
balanced to a great extent in this test.
We know, (i) Time Reversal Test (T.R.T) is satisfied if, P01 × P10 =1
 p1q1
(ii) Factor Reversal Test (F.R.T.) is satisfied if, P01 × Q01 =
 p0 q0
 p1q0  p1q1  p0 q1  p0 q0
According to Fisher’s formula, P01 =  and P10 = 
 p0 q0  p0 q1  p1q1  p1q0
 p1q0  p1q1  p0 q1  p0 q0
P01 × P10 =    = 1= 1
 p0 q0  p0 q1  p1q1  p1q0
Fisher’s index number satisfies time reversal test.
 p1q0  p1q1  q1 p0  q1 p1
Again, P01 =  , Q01 = 
 p0 q0  p0 q1  q0 p0  q0 p1
 p1q0  p1q1  q1 p0  q1 p1
P01 × Q01 =   
 p0 q0  p0 q1  q0 p0  q0 p1
 p1q1
=
 p0 q0
Hence, Fisher’s index number satisfies time reversal test and factor reversal test.
Q .(2010):- Describe the uses of index number in business.
=) Index number are playing an increasingly significant role in business planning and in
the formulation of executive decisions. They are not directly used to prepare forecasts but
many of techniques employed in preparing forecasts utilize index numbers. For example,
in correlation analysis either the dependent or independent variable or both may be in the
form of index number. Many businesses are often reluctant to give out information
concerning sales, profits, and the like. They may be induced to release some of the same
data in the form of index numbers which permit the absolute value of this restricted
information to be concealed. Under such conditions, it is possible to present index
numbers indicating whether a firm’s profits or sales have increased or decreased over a
period of years without revealing the total amount of profits or sales.

Mizan sir:- 01911-971203

1. Math:-1. For the following data, calculate price index number of 2013 with 2012
as the base year, using: (a) Laspeyers method, (b) Paasche’s method and (c) Fisher’s
method.

2012 2013
Commodity Price Quantity Price quantity
A 20 8 40 6
B 50 10 60 5
C 40 15 50 15
D 20 20 20 25

Solution: calculation of Laspeyers, Paasche’s and Fisher’s Ideal Index

Base year Current year

Commodity p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
A 20 8 40 6 320 160 240 120
B 50 10 60 5 600 500 300 250
C 40 15 50 15 750 600 750 600
D 20 20 20 25 400 400 500 500
pq 1 0 p q0 0 p q 1 1 p q0 1

=2070 =1660 =1790 =1470

 p1q0 2070
Laspeyers Index: P01= × 100 = ×100 = 124.7
 p0 q0 1660
 p1 q1 1790
Paasche’s Index: P01= × 100 = ×100 = 121.77
 p0 q1 1470
 p1q0  p1q1
Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
2070 1790
=   100 = 1.575 × 100= 1.254 × 100 = 125.4
1660 1470

Mizan sir:- 01911-971203

2. Math:-2. Calculate from the following data, the Fisher’s Ideal Index Number for
the year 2013:
2012 2013
Commodity Price Expenditure of Price Expenditure of
quantity consumed quantity consumed
(TK.) (TK.)
A 8 200 65 1950
B 20 1400 30 1650
C 5 80 20 900
D 10 360 15 300
E 27 2160 10 600

Solution: First find quantity by dividing expenditure by price

Calculation of Fisher’s Ideal Index table
Base year Current year

Commodit p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
y
A 8 25 65 30 1625 200 1950 2400
B 20 70 30 55 2100 1400 1650 1100
C 5 16 20 45 320 80 900 225
D 10 36 15 20 540 360 300 200
E 27 80 10 60 800 2160 600 1620
pq 1 0 p q0 0 p q 1 1 p q0 1

=5385 =4200 =5400 =3385

 p1q0  p1q1
Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
5385 5400
=   100 = 2.05 × 100 =1.43 × 100= 143.
4200 3385

Mizan sir:- 01911-971203

3. Math :-3. Mitali and Chaitali Garments Ltd. Provided the following information
from their MIS department as follows:
Monthly production in Weights Wholesale price TK. Per
Item thousand units unit
2000 2002 W% 2000 2002
A 2 3 10 50 60
B 3 4 20 60 70
C 4 5 80 70 80
D 3 2 20 120 125
E 2 2 10 20 21
Requred:
(i) Index number of industrial production of 2002 taking 2000 as the base.
(ii) Production Price Index Number of 2002 taking 2000 as the base.
(iii) Comment on the results.
(i) Table for Calculation of Index Number
Item Wholesale Price Monthly p1 q0 p0 q0 p1 q1 p0 q1
Production
2000 2002(p1) 2000(q0) 2002(q1)
(p0)
A 50 60 2 3 120 100 180 150
B 60 70 3 4 210 180 280 240
C 70 80 4 5 320 280 400 350
D 120 125 3 2 375 360 250 240
E 20 21 2 2 42 40 42 40
pq 1 0 p q0 0 p q
1 1 p q
0 1

=1067 =960 = 1152 = 1020

We know, Fisher’s Index Number:

 p1q0  p1q1
P01 =  × 100
 p0 q0  p0 q1
1067 1152
=  × 100
960 1020
= 1.111 1.129 = 1.2543 × 100 = 1.12 × 100 = 112
(ii) Calculation of Producer’s Price Index
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Item Price base Price Current Price Index, W% PW
year=2000 year=`2002(p1) p
P= 1 × 100
(p0) p0
A 50 60 60 10 1200
× 100=120
50
B 60 70 70 20 2333.4
×
60
C 70 80 100=116.67 40 4571.6
80
×
D 120 125 70 20 2083.4
100=114.29
E 20 21 125 10 1050
×
120
100=104.17
21
× 100= 105
20
 W=100  PW=11238.4

Producer’s price index/ cost of living index:

 PW 11238.4
= = =112.384
W 100
Comments: From the above calculation we found that the index number of industrial
production is 112%. Hence the industrial production is increased by (112- 100)%, or,
12% as compared to 2000 to 2002. And Producer’s Price Index is 112.384%. hence the
price of production is increased by (112.384-100)% or 12.384 as compared to 2000 in
2002.
4. Math:-4. Given below the per capita weekly income of a society and their cost of
living index. Calculate the real income considering the increase of living cost.
Discuss the percentage of real income.
Year 1990 1991 1992 1993 1994 1995 1996 1997
Cost of living 100 104 116 160 205 250 290 310
index
Weekly income 365 402 485 520 560 590 640 670

Mizan sir:- 01911-971203

Year Weekly Cost Real income Change of real income =
income of Weekly income Re al income in current year
=  100  100
living Cost of living index Re al income in based year
index
1990 365 100 365
× 100 = 365
100
1991 402 104 402 386.54
× 100 = 386.54 × 100 = 105.9%
104 365
1992 485 116 485 418.10
× 100 = 418.10 × 100 = 108.16%
116 386.54
1993 520 160 520 325
× 100 = 325 × 100 = 77.73%
160 418.10
1994 560 205 560 273.17
× 100 = 273.17 × 100 = 84.5%
205 325
1995 590 250 590 236
× 100 = 236 × 100 = 86.39%
250 273.17
1996 640 290 640 220.69
× 100 = 220.69 × 100 = 93.51%
290 236
1997 670 310 670 216.13
× 100 = 216.13 × 100 = 97.93%
310 220.69
Comment: the above table shown that, the change of real income in 1991 and 1992
above for that reason the real per capita income and living status increased. The change
of real income from 1993 to 1997 below 100% for that reason real income didn’t increase
though the weekly income increased that year.

5. Math-(2011). Construct Fisher’s Ideal Index from the following data and show
that it satisfies time reversal and factor reversal tests:-
2010 2011
Commodity Price Quantity Price quantity
A 10 10 12 12
B 15 5 20 6
C 8 10 10 11
D 20 3 25 2
E 50 10 60 9
Solution: calculation of Fisher’s Ideal Index

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Base year Current year

Commodity p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
A 10 10 12 12 120 10 144 120
B 15 5 20 6 100 75 120 90
C 8 10 10 11 100 80 110 88
D 20 3 25 2 75 60 50 40
E 50 10 60 9 600 500 540 450
pq 1 0 p q0 0 p q 1 1 p q0 1

=995 =815 =964 =788

 p1q0  p1q1
Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
995 964
=   100 = 1.4935 × 100=1.222 × 100 =122.2
815 788
Time Reversal Test: Time reversal test is satisfied when:
P01 × P10 =1
 p0 q1  p0 q0 788 815
P10 =  = 
 p1q1  p1q0 964 995
995 964 788 815
P01 × P10 =    = 1= 1
815 788 964 995
Hence time reversal test is satisfied.
Factor Reversal Test : Factor reversal test is satisfied when:
 p1q1
P01 × Q01 =
 p0 q0
 q1 p0  q1 p1 788 964
Q01 =  = 
 p0 q0  q0 p1 815 995
995 964 788 964 964
P01 × Q01 =    =
815 788 815 995 815
 p1q1 964
is also equal to . Hence factor reversal test is satisfied by the given data.
 p0 q0 815

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6. Math.(2010):- an inquiry the budgets of middle class families in a village near
Rajshahi gave the following information:
(i)The weighted arithmetic mean; (ii) The weighted geometric mean
Cost Food Rent Cloth Fuel Others
35% 20% 15% 20% 10%
2009 150 50 100 60 20
2010 174 60 125 90 25

Construct cost of living index and comment on the change in the cost of living in 2010
compared to 2009.
Solution: Calculation of consumer Price Index
(Using weighted arithmetic mean)
Expenses 2009 2010 Price
on P0 P1 Index, W PW
p1
P= ×
p0
100
Food 150 174 116 35 4060
Rent 50 60 120 20 2400
Cloth 100 125 125 15 1875
Fuel 60 90 150 20 3000
Others 20 25 125 10 1250
 W=100  PW=12585

 PW 12585
Cost of Living Index = = =125.85
W 100
Comments: From the above calculation we found that the cost of living index for 2010 is
125.85. hence the cost of living index is increased by (125.85- 100)% = 25.85% as
compared to 2009 in 2010.
Calculation of consumer Price Index

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(Using weighted geometric mean)
Expenses P Log P Weights(W) Log P.W
on
Food 116 2.0645 35 72.2575
Rent 120 2.0792 20 41.584
Cloth 125 2.0969 15 31.4535
Fuel 150 2.1761 20 43.522
Others 125 2.0969 10 20.9690
 W=100  LogPW=209.786

Consumer Price Index = Antilog [ 

LogPW
]
W
209.786
= Antilog [ ] = Antilog 2.09786 = 125.27(Ans)
100

7. Math (2009):- In the construction of a certain consumer price index, the following
group index numbers were found. Calculate the consumer price index by using-
(i)The weighted arithmetic mean;
(ii) The weighted geometric mean
Groups Index Weights
Food 300 5
Fuel and Lighting 250 1
Clothing 280 1
Housing Rent 200 2
Miscellaneous 150 1

Solution: (i) construction of Consumer Price Index (using weighted arithmetic mean)
Groups Index (I) Weights (W) IW
Food 300 5 1500
Fuel and Lighting 250 1 250
Clothing 280 1 280
House Rent 200 2 400
Miscellaneous 150 1 150

 W=10  IW=2580

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Mizan sir:- 01911-971203

 IW 2580
Consumer Price Index = = =258
W 10
Solution: (ii) construction of Consumer Price Index (using weighted geometric mean)
Groups Index (I) Log I Weights (W) logIW
Food 300 2.4771 5 12.3855
Fuel and Lighting 250 2.3979 1 2.3979
Clothing 280 2.4472 1 2.4472
House Rent 200 2.3010 2 4.6020
Miscellaneous 150 2.1761 1 2.1761
 W=10  Log
IW=24.0087

 LogIW 24.0087
Consumer Price Index = Antilog ( ) = Antilog ( )
W 10
= Antilog 2.40087
= 256.27 [Ans}.

8. Math (2008):- Calculate Fisher’s ideal index and show it satisfies time reversal
test and factor reversal test.
2007 2008
Commodities Price Quantity Price Quantity
A 12 20 14 30
B 14 15 20 15
C 10 12 15 20
D 6 8 5 10
E 8 5 6 5

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Solution: calculation of Fisher’s Ideal Index
Base year Current year

Commodity p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
A 12 20 14 30 280 240 420 360
B 14 15 20 15 300 210 300 210
C 10 12 15 20 180 120 300 200
D 6 8 5 10 40 48 50 60
E 8 5 6 5 30 40 30 40
pq 1 0 p q0 0 p q 1 1 p q0 1

=830 =658 =1100 =870

 p1q0  p1q1
Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
830 1100
=   100 = 1.5949 × 100=1.263 × 100 =126.3
658 870
Time Reversal Test: Time reversal test is satisfied when:
P01 × P10 =1
 p0 q1  p0 q0 870 658
P10 =  = 
 p1q1  p1q0 1100 830
830 1100 870 658
P01 × P10 =    = 1= 1
658 870 1100 830
Hence time reversal test is satisfied.
Factor Reversal Test: Factor reversal test is satisfied when:
 p1q1
P01 × Q01 =
 p0 q0
 q1 p0  q1 p1 870 1100
Q01 =  = 
 p0 q0  q0 p1 658 830
830 1100 870 1100 1100
P01 × Q01 =    =
658 870 658 830 658
 p1q1 1100
is also equal to . Hence factor reversal test is satisfied by the given data.
 p0 q0 658

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Mizan sir:- 01911-971203

9. 2012: Mizan and Mamun Garments Ltd. Provided the following information
from their MIS department as follows:
Monthly production in Weights Wholesale price TK. Per
Item thousand units unit
2010 2012 W% 2010 2012
A 2 3 10 50 60
B 3 4 20 60 70
C 4 5 80 70 80
D 3 2 120 120 125
E 2 2 10 20 21

(i) Index number of industrial production of 2012 taking 2010 as the base. 4
(ii) Production Price Index Number of 2012 taking 2010 as the base. 4
(iii) Comment on the results. 2
Solution:
(i) Table for Calculation of Index Number
Item Wholesale Price Monthly p1 q0 p0 q0 p1 q1 p0 q1
Production
2010 2012(p1) 2010(q0) 2012(q1)
(p0)
A 50 60 2 3 120 100 180 150
B 60 70 3 4 210 180 280 240
C 70 80 4 5 320 280 400 350
D 120 125 3 2 375 360 250 240
E 20 21 2 2 42 40 42 40
pq 1 0 p q
0 0 p q
1 1 p q
0 1

=1067 =960 = 1152 = 1020

We know, Fisher’s Index Number:

 p1q0  p1q1
P01 =  × 100
 p0 q0  p0 q1
1067 1152
=  × 100
960 1020
= 1.111 1.129 = 1.2543 × 100 = 1.12 × 100 = 112
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(ii) Calculation of Producer’s Price Index
Item Price base Price Current Price Index, W% PW
year=2010 year=`2012(p1) p
P= 1 × 100
(p0) p0
A 50 60 60 10 1200
× 100=120
50
B 60 70 70 20 2333.4
×
60
C 70 80 100=116.67 80 9143.2
80
×
D 120 125 70 120
100=114.29 12500.4
125
E 20 21 × 10
120
1050
100=104.17
21
× 100= 105
20
 W=240  PW=26227

Producer’s price index/ cost of living index:

 PW 26277
= = =109.49
W 240
Comments: From the above calculation we found that the index number of industrial
production is 112%. Hence the industrial production is increased by (112- 100)%, or,
12% as compared to 2010 to 2012. And Producer’s Price Index is 109.49%. hence the
price of production is increased by (109.49-100)% or 9.49% as compared to 2010 in
2012.

10. 2013: (b) calculate price indices from the following data:-
(i) Laspeyres Index;
(ii) Paasche Index;
(iii) Fisher’s Index;
(iv) Bowey’s Index Number for the year 2013:

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Mizan sir:- 01911-971203

2012 2013
Commodity Price (tk.) Expenditure on Price (tk.) Expenditure on
selected quantity consumed quantity consumed
(tk.) (tk.)
A 8 200 65 1950
B 20 1400 30 1650
C 5 80 20 900
D 10 360 15 300
E 27 2160 10 600
Solution: First find quantity by dividing expenditure by price
Base year Current year

Commodit p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
y
A 8 25 65 30 1625 200 1950 2400
B 20 70 30 55 2100 1400 1650 1100
C 5 16 20 45 320 80 900 225
D 10 36 15 20 540 360 300 200
E 27 80 10 60 800 2160 600 1620
pq 1 0 p q0 0 p q 1 1 p q0 1

=5385 =4200 =5400 =3385

 p1q0 5385
(i)Laspeyers Index: P01= × 100 = ×100 = 128.21
 p0 q0 4200
 p1 q1 5400
(ii)Paasche’s Index: P01= × 100 = ×100 = 159.53
 p0 q1 3385
 p1q0  p1q1
(iii)Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
5385 5400
=   100 = 2.05 × 100 =1.43 × 100= 143
4200 3385
pq 1 0

pq 1 1 5385 5400

(iv)Bowleys Index Number P01 = p q0 0 p q0 1
× 100 = 4200 3385 × 100
2 2
1.28  1.60
= × 100= 1.44×100=144
2
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Mizan sir:- 01911-971203

11. Construct fisher ideal index number from the following data. Show that it satisfies time
reversal test and factor reversal test. 10
Commodity 2008 2012
Price Quantity Price Quantity
A 10 12 12 15
B 8 5 15 10
C 20 14 25 15
D 40 8 50 12
E 25 6 30 9

Soltuion: calculation of Fisher’s Ideal Index

Base year Current year

Commodity p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
A 10 12 12 15 144 120 180 150
B 8 5 15 10 75 40 150 80
C 20 14 25 15 350 280 375 300
D 40 8 50 12 400 320 600 480
E 25 6 30 9 180 150 270 225
pq 1 0 p q0 0 p q 1 1 p q0 1

=1149 =910 =1575 =1235

 p1q0  p1q1
Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
1149 1575
=   100 =126.876
910 1235
Time Reversal Test: Time reversal test is satisfied when:
P01 × P10 =1
 p0 q1  p0 q0 1235 910
P10 =  = 
 p1q1  p1q0 1575 1149
1149 1575 1235 910
P01 × P10 =    = 1= 1
910 1235 1575 1149

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Mizan sir:- 01911-971203

Hence time reversal test is satisfied.
Factor Reversal Test : Factor reversal test is satisfied when:
 p1q1
P01 × Q01 =
 p0 q0
1149 1575 1235 1575 1575 2  p1q1
P01 × Q01 =    = ( ) = (showed)
910 1235 910 1149 910  p0 q0
12. (2015):- An inquiry into the budgets of middle class families in a village gave the
following information: 5
Expenses on Food Rent Cloth Education Misc
30% 25% 15% 10% 10%
Price (Rs) 1800 1000 700 400 700
2009
Price (Rs) 2000 1200 900 500 1000
2010
Construct cost of living index and component on the change in the cost of 2010
compared to 2009.
Solution: Calculation of consumer Price Index
Expenses 2009 2010 Price
on P0 P1 Index, W PW
p1
P= ×
p0
100
Food 1800 2000 111.11 30 3333.33
Rent 1000 1200 120 25 3000
Cloth 700 9000 128.57 15 1928.55
Education 400 500 125 10 1250
Misc 700 1000 142.857 20 2857.14
 W=100  PW=12369.02

 PW 12369.02
Cost of Living Index = = =123.69
W 100
Comments: From the above calculation we found that the cost of living index for 2010 is
123.69. hence the cost of living index is increased by (123.69- 100)% = 23.69% as
compared to 2009 in 2010.

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Mizan sir:- 01911-971203

13. (2016) Construct fisher ideal index number from the following data. Show that it
satisfies time reversal test and factor reversal test:- 7

Commodity 2015 2016

Price Quantity Price Quantity

A 10 10 12 12

B 15 5 20 6

C 8 10 10 11

D 20 3 25 2

E 50 10 60 9

(b) Solution: calculation of Fisher’s Ideal Index

Base year Current year

Commodity p0 q0 p1 q1 p1 q0 p0 q0 p1q1 p0 q1
A 10 10 12 12 120 10 144 120
B 15 5 20 6 100 75 120 90
C 8 10 10 11 100 80 110 88
D 20 3 25 2 75 60 50 40
E 50 10 60 9 600 500 540 450
pq 1 0 p q 0 0 p q 1 1 p q 0 1

=995 =815 =964 =788

 p1q0  p1q1
Fisher’s Ideal Index P01=   100
 p0 q0  p0 q1
995 964
=   100 = 1.4935 × 100=1.222 × 100 =122.2
815 788
Time Reversal Test: Time reversal test is satisfied when:
P01 × P10 =1
 p0 q1  p0 q0 788 815
P10 =  = 
 p1q1  p1q0 964 995

21

Mizan sir:- 01911-971203

995 964 788 815
P01 × P10 =    = 1= 1
815 788 964 995
Hence time reversal test is satisfied.
Factor Reversal Test : Factor reversal test is satisfied when:
 p1q1
P01 × Q01 =
 p0 q0
 q1 p0  q1 p1 788 964
Q01 =  = 
 p0 q0  q0 p1 815 995
995 964 788 964 964
P01 × Q01 =    =
815 788 815 995 815
 p1q1 964
is also equal to . Hence factor reversal test is satisfied by the given data.
 p0 q0 815

Ok-12.12.17

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Mizan sir:- 01911-971203