Question

A) What are the difficulties in the construction of the consumer price index?

B) An enquiry into the budgets of middle class families in a certain city gave the following information:

$\begin{array}{cccccc}\text{Expenses on}& \text{Food}& \text{Fuel}& \text{Clothing}& \text{Rent}& \text{Other}\\ & 30\%& 10\%& 20\%& 15\%& 20\%\\ \text{Price in 2004 (Rs)}& 1500& 250& 750& 300& 400\\ \text{Price in 1995 (Rs)}& 1400& 200& 500& 200& 250\end{array}$

What is the cost of living index of 2004 as compared to 1995?

Answer 1

A) The difficulties in the construction of the consumer price index are:

1. Prices used in the construction of cost of living index are retail prices, which vary from shop to shop, place to place and consumer to consumer. Therefore, index numbers prepared on such prices cannot be used for different places or different classes of people.

2. It includes so many commodities of unstable quality, which will not be used at the different points in time.

3. The ratio of expenditure on different commodities at different point of time and by various persons is not the same, which creates difficulties in construction of cost of living index numbers.

Thus there will be a variety of cost of living indices depending upon region, group, community etc.

B)

Cost of living index for the year 2004

= $\frac{\sum RW}{\sum W}$

= $\frac{13,449.9}{100}$

= 134.499

Cost of living index = 134.499. It means there is an increase of 34.499% in prices in 2004 as compared to 1995.