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# Method of constructing consumer price index there are

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Unformatted text preview: 1.127 × 100 = 1.062 × 100 = 106.2 = Time Reversal test: Time Reversal test is satisfied when P01 × P10 = 1 Σp1q 0 Σp1q1 P01 = × Σp0 q 0 Σp0 q1 = 264 352 × 250 330 257 Σ p 0 q1 Σp 0 q 0 × Σp1 q1 Σp1 q0 P10 = 330 250 × 352 264 250 264 352 330 Now P01 × P10 = × × × 250 330 352 264 =1 =1 Hence Fisher ideal index satisfy the time reversal test. = Factor Reversal test: Factor Reversal test is satisfied when P01 × Q01 = Now P01 = = Q01 = = Σp1 q 0 Σp1q1 × Σp 0 q 0 Σp 0 q1 264 352 × 250 330 Σq1 p0 Σq1 p1 × Σq 0 p 0 Σq 0 p1 330 352 × 250 264 Then P01 × Q01 = 264 352 330 352 × × × 250 330 250 264 352 = 250 352 = 250 2 258 Σp1q1 Σp 0 q 0 Σp1q1 Σp 0 q 0 Hence Fisher ideal index number satisfy the factor reversal test. 10.8 Consumer Price Index Consumer Price index is also called the cost of living index. It represent the average change over time in the prices paid by the ultimate consumer of a specified basket of goods and services. A change in the price level affects the costs of living of different classes of people differently. The general index number fails to reveal this. So there is the need to construct consumer price index. People consume different types of commodities. People’ s consumption habit is also different from man to man, place to place and class to class i.e richer class, middle class and poor class. The scope of consumer price is necessary, to specify the population group covered. For example, working class, poor class, middle class, richer class, etc and the geographical areas must be covered as urban, rural, town, city etc. = Use of Consumer Price index The consumer price indices are of great significance and is given below. 1. This is very useful in wage negotiations, wage contracts and dearness allowance adjustment in many countries. 2. At government level, the index numbers are used for wage policy, price policy, rent control, taxation and general economic policies. 3. Change in the purchasing power of money and re...
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## This note was uploaded on 01/18/2014 for the course BUS 100 taught by Professor Moshiri during the Winter '08 term at UC Riverside.

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