Plus One Economics – Chapter 18 Questions and Answers in English

Multi choice questions

1. Which of the following is known as cost of living index?
1. Consumers price index
2. Wholesale price index
3. Industrial production index
4. All the above

Answer:

A. Consumers price index

2. Index number can be calculated for
1. Price
2. Volume
3. Planning commission
4. All the above

Answer:

D. All the above

3. In 2017 the price of oil increased 30% compared to 2010. Identify the base year and the current year
1. Base year 2010, Current year 2017
2. Base year 2017, Current year 2010
3. No base year
4. No current year

Answer:

A. Base year 2010, Current year 2017

4. Which of the following indicates the changes in general price level?
1. Consumers price index
2. Wholesale price index
3. Industrial production index
4. None of the above

Answer:

B. Wholesale price index

5. An index number which accounts for the relative importance of the items is known as
1. weighted index
2. simple aggregative index
3. simple average of relatives
4. all the above

Answer:

A. weighted index

6. In most of the weighted index numbers the weight
   pertains to
1. base year
2. current year
3. both base and current year
4. none of these

Answer:

B. current year

7. The impact of change in the price of a commodity with little weight in the index will be
1. small
2. large
3. uncertain
4. none of these

Answer:

A. small

8. A consumer price index measures changes in
1. retail prices
2. producers prices
3. wholesale prices
4. none of these

Answer:

A. retail prices

9. The item having the highest weight in consumer price index for industrial workers is
1. Food
2. Clothing
3. Housing
4. all the above

Answer:

A. Food

10. In general, inflation is calculated by using
1. wholesale price index
2. consumer price index
3. producer’s price index
4. all the above

Answer:

A. wholesale price index

11. The current and base year prices of a group of commodities are Rs. 180 and Rs. 135 respectively. It shows..
1. price is said to have risen by 30.33%
2. price is decreased by 33.33%
3. price is increased by 133.33%
4. none of the above

Answer:

B. price is said to have risen by 33.33%

1. What is the other name of the consumer price index ?
Answer:

The other name of the consumer price index is price deflater of income.

2. What is base period ?
Answer:

Base period is the reference period with which the current period is compared.

3. Index numbers are very useful in deflating. Explain.
Answer:

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

4. Point out the desirable properties of the base year
Answer:

The desirable properties of base year are:


• a) The base year should be a normal year.
• b) Extreme values should not be selected as base period.
• c) It should not belong to too far in the past.
5. There are two methods of constructing an index number. What are they?
Answer:
1. Simple index numbers
2. Weighted index number
6. Define index number.
Answer:

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

7. Write a short note on sensex
Answer:

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.

8. Consumer price indices are of great useful because of various reasons. What are they ?
Answer:
• a) They determine the purchasing power of money.
• b) They are helpful in determination of real wages.
• c) They are helpful in wage negotiations and wage contracts.
• d) They help in deflating income and value series in national accounts.
• e) They help the government in formulation of wage policy, price policy, rent control and making general economic policies.
9. Name some important index number in use.
Answer:
• a) Consumer Price Index
• b) Wholesale Price Index
• c) Industrial Production Index
• d) Producer Price Index
• e) Index number of Agricultural Production
10. Mention the formula of ‘simple aggregative’ method ?
Answer:

\( \mathbf{ P_{01}\,=\frac{Σp_{1}}{Σp_{0}}}×100 \)
Here,
Σp₁ = Total of current year’s prices of different commodities.
Σp₀ = Total of base year’s prices of different commodites.


11. Write down the uses of wholesale price index.
Answer:

The wholesale price index number indicates the change in the general price level. The uses of whole- sale price index are noted down below.


1. With the help of 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.
12. Give utility of index numbers.
Answer:

The wholesale price index number indicates the change in the general price level. The uses of whole- sale price index are noted down below.


1. Index numbers simplify the facts
2. It is helpful to policy makers
3. It makes comparative study easy
4. It helps to study the general trend
13. What are the limitations of index numbers ?
Answer:

The limitations of index numbers are mentioned below.


1. Index numbers are not fully true.
2. They do not help in international comparison.
3. They are prepared with certain specific objectives.
4. It is difficult to collect retail prices. So, index numbers based on wholesale prices may be misleading.
14. Construct an index number for 1991 taking 1990 as base year.
    

    Table 18.1
    Commodities	Price in 1990	Price in 1991
    Wheat	90	95
    Rice	40	60
    Seeds	90	110
    Milk	30	35

Answer:

Table 18.2
Commodities	Price in 1990	Price in 1991
Wheat	90	95
Rice	40	60
Seeds	90	110
Milk	30	35
	Σp0 = 250	Σp1 = 300

\( \mathbf{ P_{01}\,=\frac{Σp_{1}}{Σp_{0}}}×100 \)
\( \mathbf{ P_{01}\,=\frac{300}{250}}×100 \)
= 120
It shows that, when compared to 1990 the general price level in 1991 increased by 20%.

15. “Index number is used in economics for policy making” Substantiate.
Answer:

Wholesale price index number (WPI), consumer price index number (CPI) and industrial production index (IIP) are widely used in policy making.


• 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.
• The wholesale price index (WPI) is used to eliminate the effect of changes in prices on aggregates such as national income, capital formation etc.
• The 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.
• CPI are used in calculating the purchasing power of money and real wage.
• Index of industrial production gives us a quantitative figure about the change in production in the industrial sector.
• Agricultural production index provides us a ready reckoner of the performance of agricultural sector.
• 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.
16. “Certain important issues should be kept in mind, while constructing an index number” Do agree? Substantiate your answer.
Answer:

Yes, certain important issues should be kept in mind, while constructing an index number. Those issues are mentioned below


• You need to be clear about the purpose of the index. Calculation of a volume index will be inappropriate, when one needs a value index.
• 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.
• 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 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.
• Another issue is the choice of the formula, which depends on the nature of question to be studied. The only difference between the Laspeyre’s index and Paasche’s index is the weights used in these formulae.
• Besides, there are many sources of data with different degrees of reliability. Data of poor reliability will give misleading results. Hence, due care should be taken in the collection of data. If primary data are not being used, then the most reliable source ofsecondary data should be chosen.
17. Write the importance of index number in economics.
Answer:

Wholesale price index number (WPI), consumer price index number (CPI) and industrial production index (IIP) are widely used in policy making.


• 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.
• The wholesale price index (WPI) is used to eliminate the effect of changes in prices on aggregates such as national income, capital formation etc.
• The 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.
• CPI are used in calculating the purchasing power of money and real wage.
• Index of industrial production gives us a quantitative figure about the change in production in the industrial sector
• Agricultural production index provides us a ready reckoner of the performance of agricultural sector.
• 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.
18. Find the index value for the following selected commodities using Laspeyre’s method

Table 18.3
Commodities	Quantity in 1990	Price in 1990	Quantity in 2000	Price in 2000
Wheat	6	10	8	12
Rice	4	15	5	20
Seeds	5	8	3	16
Milk	3	9	6	1

Answer:

Lasppeyre’s = \( \mathbf{ P_{01}\,=\frac{Σq_{0}p_{1}}{Σq_{0}p_{0}}}×100 \)


Table 18.4
Commodities	Quantity in 1990 (q0)	Price in 1990 (p0)	q0p0	Price in 2000 (q0)	q0p1
Wheat	6	10	60	12	72
Rice	4	15	60	20	80
Seeds	5	8	40	16	80
Milk	3	9	27	1	3
			Σ = 187		Σ = 235

\( \mathbf{ P_{01}\,=\frac{Σq_{0}p_{1}}{Σq_{0}p_{0}}}×100 \)

= \( \mathbf{\frac{235}{187}}×100 \)

= 125.66.