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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers6 Marks
Question
Define wholesale price index numbers. Give its uses.
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Answer

The Wholesale price Index measures the relative changes in the prices of commodities traded in the wholesale markets. These are constructed on weekly basis. These are published every week by the office of Economic Advisor, ministry of Industry, Government of India. First, such index number was constructed in 1947 and thereafter in 1952-53 as base year in 1956. In India, 2004-05 is used as base year for constructing index numbers. In India all commodities which are used in construction of Wholesale Price Index have been grouped into three categories.
  1. Primary Articles: It includes 98 commodities like rice, fruits, pulses, vegetables and non food articles like cotton, jute, metals, non metals etc. it weightage has been 22.02.
  2. Fuel, Power, Light and Lubricants: It includes 19 items like Coal, Petroleum Products, Electricity, Lubricants, etc. It weightage has been 14.23.
  3. Manufacturing: It includes 318 items like Textiles, Sugar, Paper, Machinery, Chemicals, Fertilizers, Leather, etc. Its weightage has been 63.74.
Uses of Wholesale Price Index:
  1. Forecasting Demand and Supply: The wholesale price indices are often used to forecast demand and supply situation in the economy. By considering present demand and supply situation, we can have an idea of demand and supply in the future.
  2. Forecasting Future prices: By looking at WPI statistics of an economy or a state, one can have an idea of expected price rise in the future.
  3. Determination of Real Changes in Aggregates: The wholesale price index enables us to find out the real changes in aggregates like national income and national expenditure. It can be understood by looking at the formula of estimating real national income from nominal national income.
Real Change in National Income = () × Wholesale price of Base Year

It is clear from above that given Wholesale price index we can convert nominal aggregates into real aggregates which are free from the effect of price changes.
  1. Indicator of Rate of Inflation: Te wholesale price index is also used to find the rate of inflation in an economy in a financial year or other time period.
$=\frac{\text{Currrent year WPI-Previous year WPI}}{\text{Previous Year WPI}}\times100$

Wholesale price index is prepared every week. If suppose WPI for week 1 is 400 and for week 2 it is 450 then rate of inflation will be equal to:

$\text{Rate of infaltion}=\frac{450-400}{400}\times100$
  1. Useful in Planning: Government launches many plans which require huge amount of expenditure and take a long time in their completion. It is difficult to estimate the cost of their construction without availability of WPI. Government needs to make provision for these in its five year plans. It is useful in finding the real cost of producing these goods and services. Government also needs to know rate of inflation for making efficient plans and to allocate resources amongst different schemes and sectors of the economy.

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