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Maharashtra State Board · HSC Commerce · Class 12 (Std XII)

Class 12 Economics Chapter 6: Index Numbers

Short notes, key concepts, quick revision and practice MCQs with answers

Index numbers are statistical tools that show relative changes in prices, quantities or values over time. The chapter covers their features, types, uses, construction, simple and weighted methods, and limitations.

Key concepts: Index Numbers

Index number
A statistical device, a specialised average expressed as a percentage, that shows the net change in one variable or a group of related variables over time or between places.
Base year and current year
The base year is the reference year against which changes are measured and its index is taken as 100. The current year is the year being compared. Suffix 0 marks base and suffix 1 marks current.
Types of index numbers
Price index (changes in price level), quantity index (changes in physical output), value index (price x quantity, in rupee terms) and special purpose index (such as import-export or share price indices).
Simple index number
A method in which every commodity gets equal importance. It is the easiest method and can be used for price, quantity and value indices.
Weighted index number
A method in which commodities get weights showing their relative importance, usually quantities. Laspeyres and Paasche indices are the main examples.
Laspeyres price index
A weighted price index that uses base year quantities as weights. Formula: sum of p1q0 divided by sum of p0q0, multiplied by 100.
Paasche price index
A weighted price index that uses current year quantities as weights. Formula: sum of p1q1 divided by sum of p0q1, multiplied by 100.
Limitations of index numbers
They rest on samples, may use biased data, can be misused through choice of base year, have formula defects, ignore changes in tastes and quality, and may use arbitrary weights.

Quick revision: important points

Practice MCQs with answers

  1. Which statement best describes an index number?

    1. A tool that measures the absolute size of a variable
    2. A device that measures relative changes in a variable over time
    3. A method of counting the population of a region
    4. A tax collected on changes in prices
    Show answer

    Answer: B. A device that measures relative changes in a variable over time
    An index number does not measure exact values directly. It shows relative change, usually as a percentage of a base.

  2. In index number construction, the index of the base year is assumed to be

    1. 0
    2. 10
    3. 100
    4. 1000
    Show answer

    Answer: C. 100
    The base year is the reference point, so its index is taken as 100 and other years are worked out against it.

  3. In the notation p0 and q0, the suffix 0 refers to

    1. The base year
    2. The current year
    3. The next year
    4. The average of all years
    Show answer

    Answer: A. The base year
    The suffix 0 marks the base year and the suffix 1 marks the current year.

  4. Why are index numbers often called barometers of economic activity?

    1. They measure air pressure
    2. They are prepared only by the central bank
    3. They always remain constant over time
    4. They show trends and changes in the economy
    Show answer

    Answer: D. They show trends and changes in the economy
    Just as a barometer signals changes in weather, index numbers signal upward or downward trends in economic variables.

  5. An index built from only one variable, such as the price of wheat alone, is called a

    1. Univariate index
    2. Composite index
    3. Value index
    4. Weighted index
    Show answer

    Answer: A. Univariate index
    An index from a single variable is univariate. One built from a group of variables is a composite index.

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