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Index Numbers — Economics STD 11 Commerce — Question

CBSE BoardEnglish MediumSTD 11 CommerceEconomicsIndex Numbers4 Marks
Question
Explain the concept of deflating using index numbers.
✓

Answer

Deflating means correcting or adjusting a value which has inflated. It makes allowances for the effect of price changes. When prices rise, the purchasing power of money declines. If the money incomes of people remain constant between two periods and prices of commodities are doubled the purchasing power of money is reduced to half. For example if there is an increase in the price of rice from ₹ 10/ kg in the year 1980 to ₹ 320/kg in the year 1982. Then a person can buy only half kilo of rice with ₹ 10. so the purchasing power of a rupee is only 50 paise in 1982 as compared to 1980. Thus the purchasing power of money $=\frac{1}{\text{ Price Index}}$ In times of rising prices the money wages should be deflated by the price index to get the figure of real wages. The real wages alone tells whether a wage earner is in better position or in worst position. For calculating real wage, the money wages or income is divided by the corresponding price index and multiplied by 100.$\text{i.e. Real wages}=\frac{\text{Money wages}}{\text{Price Index}}\times100 $
$\text{Thus Real wages Index}=\frac{\text{Real wage of current year }}{\text{Real wage of base year}}\times100.$

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