Coupon Accepted Successfully!


Consumer Price Index Number (Cost of Living Index Numbers)

Consumer price index number is an index number of the cost met by a specified class of consumer in buying goods and services needed in day-to-day life. The patterns of consumption of goods are different in different classes. And so, the general index numbers fail to indicate the changes in costs with regard to varying classes of consumers.

Uses of Consumer Price Index Numbers

  • They indicate the changes in the consumer prices. Thus, they help government in formulating policies regarding control of price, taxation, imports and exports of commodities, etc.
  • They are used in granting allowances and other facilities to employees
  • They are used for the evaluation of purchasing power of money. They are used for deflating money
  • They are used for comparing changes in the cost of living of different classes of people
  • There are two methods of computation of consumer price index number. They are:
  1. Aggregative expenditure method
    Here, the quantities used in the base year are taken as weights. Thus, the consumer price index number is
    Description: 69644.png 

Calculate the consumer price index number for the year 2005 with respect to the base 1980.
Here, the base year quantities are known. Therefore, aggregative expenditure method is adopted.
The consumer price index number for 2005 with base year 1980 is
Description: 69670.png 
  1. Family budget method
    Consumer price index number by this method is the weighted Arithmetic Mean of the price relatives. The weights assigned are the expenditure in a normal period. Thus, the consumer price index number isDescription: 69705.pngwhere w and P denote weights and price relatives respectively.

Compute the cost of living index number by using the following data.
Items Weight Price (₹)
Base Year Current Year
Food 10 150 225
House rent 5 50 150
Clothing 2 30 60
Fuel and lighting 3 30 75
Miscellaneous 5 50 75
Here, the weights are known. Therefore, family budget method is used.
Items w p0 p1 Description: 69739.png wI
Food 10 150 225 150 1500
House rent 5 50 150 300 1500
Clothing 2 30 60 200 400
Fuel and lighting 3 30 75 250 750
Miscellaneous 5 50 75 150 750
Total 25       4900
The cost of living index number by family budget method is Description: 69749.png 

Test Your Skills Now!
Take a Quiz now
Reviewer Name