# Plus One Economics Chapter Wise Questions and Answers Chapter 8 Index Numbers

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## Kerala Plus One Economics Chapter Wise Questions and Answers Chapter 8 Index Numbers

### Plus One Economics Index Numbers One Mark Questions and Answers

Question 1.
Which of the following is known as cost of living index?
(a) Consumers price index
(b) Wholesale price index
(c) Industrial production index
(d) All the above
(a) Consumers price index

Question 2.
Index number can be calculated for ……….
(a) Price
(b) Quantity
(c) Volume
(d) All the above
(d) All the above

Question 3.
In 2017 the price of oil increased by 30% compared to 2010. Identify the base year and the current year.
Base year 2010, Current year 2017

Question 4.
Which of the following indicates the changes in general price level?
(a) Consumers price index
(b) Wholesale price index
(c) Industrial production index
(d) All the above
(b) Wholesale price index

Question 5.
An index number which accounts for the relative importance of the items is known as
(a) weighted index
(b) simple aggregative index
(c) simple average of relatives
(d) all the above
(a) weighted index

Question 6.
In most of the weighted index numbers the weight pertains to
(a) base year
(b) current year
(c) both base and current year
(d) none of these
(b) current year

Question 7.
The impact of change in the price of a commodity with little weight in the index will be
(a) small
(b) large
(c) uncertain
(d) none of these
(a) small

Question 8.
A consumer price index measures changes in
(a) retail prices
(b) wholesale prices
(c) producers prices
(d) none of these
(a) retail prices

Question 9.
The item having the highest weight in consumer price index for industrial workers is
(a) Food
(b) Housing
(c) Clothing
(d) all the above
(a) Food

Question 10.
In general, inflation is calculated by using
(a) wholesale price index
(b) consumer price index
(c) producers’ price index
(a) wholesale price index

Question 11.
What is the other name of the consumer price index?
The other name of the consumer price index is price deflator of income.

Question 12.
What is base period?
Base period is the reference period with which the current period is compared.

### Plus One Economics Index Numbers Two Mark Questions and Answers

Question 1.
Index numbers are very useful in deflating. Explain.
Index numbers are very useful in deflating. They are very useful adjusting original data into real values. For example, money wages can be adjusted for price changes to find out the level of real wages.

Question 2.
Write down the uses of the wholesale price index.
The wholesale price index number indicates the change in the general price level. The uses of the wholesale price index are noted down below.

1. With the help of the wholesale price index, we can estimate the future demand and supply situations
2. It helps in forecasting future prices
3. It is used to measure the rate of inflation
4. It can be used to eliminate the effect of change in price on aggregates such as national income, capital formation, etc.

Question 3.
Define index number.
An index number is a statistical device for measuring changes in the magnitude of a group of related variables.

Question 4.
Mention the formula of ‘simple aggregative’ method?
$$P_{01}=\frac{\sum P_{1}}{\Sigma P_{0}} \times 100$$
Here,
ΣP = Total of current year’s prices of different commodities.
ΣP0 = Total of base year’s prices of different commodites.

Question 5.
Give utility of index numbers.

1. Index numbers simplify the facts
2. It is helpful to policymakers
3. It makes comparative study easy
4. It helps to study the general trend

Question 6.
Write a short note on Sensex.
Sensex is the short form of Bombay Stock Exchange Sensitive Index with 1978 – 79 as base. The value of Sensex is with reference to this period. It consists of 30 stocks represented by 13 sectors of the economy. If Sensex rises, it indicates that the market is doing well and investors expect better earnings on their investment.

Question 7.
Consumer price indices are of great useful because of various reasons. What are they?

1. They determine the purchasing power of money.
2. They are helpful in the determination of real wages.
3. They are helpful in wage negotiations and wage contracts.
4. They help in deflating income and value series in national accounts.
5. They help the government in formulation of wage policy, price policy, rent control and making general economic policies.

### Plus One Economics Index Numbers Three Mark Questions and Answers

Question 1.
Name some important index number in use.
some important index number in use are mentioned below.

• Consumer price index
• Wholesale Price Index
• Industrial production index
• Producer Price Index
• Index number of agricultural production

Question 2.
Construct an index number for 1991 taking 1990 as base year.

It shows when compared to 1990 the general price level in 1991 increased by 20%.

Question 3.
Point out the desirable properties of the base year.
The desirable properties of base year are:

• The base year should be a normal year.
• Extreme values should not be selected as base period.
• It should not belong to too far in the past.

### Plus One Economics Index Numbers Four Mark Questions and Answers

Question 1.
What are the limitations of index numbers?
The limitations of index numbers are mentioned below.

• Index numbers are not fully true.
• They do not help in international comparison.
• They are prepared with certain specific objectives.
• It is difficult to collect retail prices. So, index numbers based on wholesale prices may be misleading.

Question 2.
“Index number is used in economics for policymaking” substantiate.
Wholesale price index number (WPI), consumer price index number (CPI) and industrial production index (IIP) are widely used in policymaking.

1. Consumer index number (CPI) or cost of living index numbers are helpful in wage negotiation, formulation of income policy, price policy, rent control, taxation and general economic policy formulation.

2. The wholesale price index (WPI) is used to eliminate the effect of changes in prices on aggregates such as national income, capital formation, etc.

3. WPI is widely used to measure the rate of inflation. Inflation is a general and continuing increase in prices. If inflation becomes sufficiently large, money may lose its traditional function as a medium of exchange and as a unit of account. Its primary impact lies in lowering the value of money.

4. CPI are used in calculating the purchasing power of money and real wage.

5. Index of industrial production gives us a quantitative figure about the change in production in the industrial sector.

6. Agricultural production index provides us a ready reckoner of the performance of agricultural sector.

7. Sensex is a useful guide for investors in the stock market. If the sensex is rising, investors are optimistic of the future performance of the economy. It is an appropriate time for investment.

### Plus One Economics Index Numbers Five Mark Questions and Answers

Question 1.
Certain important issues should be kept in mind while constructing an index number”. Do agree? Substantiate your answer.
Yes, certain important issues should be kept in mind, while constructing an index number. Those issues are mentioned below

1. You need to be clear about the purpose of the index. The calculation of a volume index will be inappropriate when one needs a value index.

2. Besides this, the items are not equally important for different groups of consumers when a consumer price index is constructed. The rise in petrol price may not directly impact the living condition of the poor agricultural labourers.

Thus the items to be included in any index have to be selected carefully to be as representative as possible. Only
then you will get a meaningful picture of the change.

3. Every index should have a base. This base should be as normal as possible. Extreme values should not be selected as base period. The period should also not belong to too far in the past. The comparison of between 1993 and 2005 is much more meaningful than a comparison between 1960 and 2005.

Many items in a 1960 typical consumption basket have disappeared at present. Therefore, the base year for any index number is routinely updated.

4. Another issue is the choice of the formula, which depends on the nature of question to be studied. The only difference between the Laspeyres index and Paasche’s index is the weights used in these formulae.

5. Besides, there are many sources of data with different degrees of reliability. Data of poor reliability will give misleading results. Hence, due care should betaken in the collection of data. If primary data are not being used, then the most reliable source of secondary data should be chosen.

Question 2.
Explain various types of index numbers.
Some Important Index Numbers
1. Consumer price index:
Consumer price index (CPI), also known as the cost of living index, measures the average change in retail prices. The CPI for industrial workers is increasingly considered the appropriate indicator of general inflation, which shows the most accurate impact of price rise on the cost of living of common people.

2. Wholesale price index:
The wholesale price index number indicates the change in the general price level. Unlike the CPI, it does not have any reference consumer category. It does not include items pertaining to services like barber charges, repairing, etc.

3. Industrial production index:
The index number of industrial production measures changes in the level of industrial production comprising many industries. It includes the production of the public and the private sector. It is a weighted average of quantity relatives. In India, it is currently calculated every month with 1993 – 94 as the base.

4. Index number of agricultural production:
The index number of agricultural production is a weighted average of quantity relatives. Its base period is the triennium ending 1981 – 82. In 2003 – 04 the index number of agricultural production was 179.5.

It means that agricultural production has increased by 79.5 percent over the average of the three years 1979 – 80, 1980 – 81 and1981 – 82. Foodgrains have a weight of 62.92 percent in this index.

5. Producer Price Index:
The producer price index number measures price changes from the producers’ perspective. It uses only basic prices including taxes, trade margins, and transport costs.