What are the methods of constructing Consumer Price Index or Cost of Living Index Numbers?
Consumer price index or cost of living index numbers are designed to measure the effect of changes in the price of group of commodities and services on the purchasing power of a particular class of society, during any given period with reference to some fixed base. Its object is to find out how much the consumers of a particular class have to pay more for a certain basket of goods and services in a given period as compared to the base period.
Following two methods are used to construct consumer price index numbers -
- Family Budget method or weighted average of relatives
- Aggregative Expenditure
Family Budget Method : In this method, the price relatives for each commodity are obtained and these price relatives are multiplied by the value weights for each item and the product is divided by the total of weights.
Consumer price index = ΣRW
ΣW
Where R = P1 X 100 and W = P0 q0
P0
This method is same as weighted average of price relatives method.
Aggregative Expenditure Method : This method is most popular method for constructing consumer price index numbers. The prices of commodities of current year as well as base year are multiplied by the quantities consumed in the base year. The aggregate expenditure of current year is divided by the aggregate expenditure of the base year and the quotient is multiplied by 100.
Consumer price Index = ΣP1q0 /ΣP0q0 X 100
This method is same as Laspeyre‘s method.
