Index Number for calculation of Cost of Living Index

Topics: Arithmetic mean, Price index, Mean Pages: 3 (599 words) Published: May 11, 2014
What methods of Index Number calculation is used to calculate Cost of Living Index (CLI).

Cost of Living Index is a type of index study which is used to examine expenses that people incur to maintain a regular life standard including food, clothing, housing and social activities. The Cost of Living Index is, with the help of two different price data sets, a comparison of the necessary minimum expenses that are needed in order to maintain the same financial status and life standard level.

Methods for construction of cost of living index are –

1.Aggregate Expenditure Method or Weighted Aggregative Method: In this method, the quantities of commodities consumed by the particular group in the base year are taken as weights. This is also known as LASPEYRE’S METHOD. The formula is given by

Consumer Price Index =

2.Family Budget Method or Method of Weighted Relatives:
In this method, cost of living index is obtained on taking the weighted average of price relatives, the weights are the values of quantities consumed in the base year i.e. . Thus, the consumer price index number is given by

Consumer Price Index =
Where for each item
, value on the base year

3.PAASCHE’S Price Index Number:
In this method the current year quantities are taken as weight.
Consumer Price Index = ∑p1q1 X100

4.DORBISH and BOWLEY’S Price Index Number:
Dorbish and Bowley have suggested the arithmetic mean of Laspeyre’s price index and Paasch’s price index in order to eliminate the influence of high and low prices. The Dorbish & Bowley formula for constructing price index number is

Consumer Price Index = ∑p0q1 +∑p1q1
∑p0q0∑p0q1X 100

5.FISHER’S Ideal Index Number:
Prof. Irwing Fisher has suggested a compromise between Laspeyre’s and Paasche’s formula by taking geometric mean of these formula. Thus Fisher’s formula for price index is given by
Consumer Price Index = ∑p0q1 + ∑p1q1 1/2 X 100...
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