Q1.

What are index numbers?

Ans: An index number is an economic data figure reflecting price or quantity compared with a standard or base value. Qb. Explain the term Basket and state the estimated number of goods and services constituting a Basket in Ghana? Specify at least 15 basic goods and services in a Basket Ans: A relatively fixed set of consumer products and services valued and used on an annual basis to track inflation in a specific market or country. The goods in the basket are often adjusted periodically to account for changes in consumer habits the basket of goods is used primarily to calculate the Consumer Price Index (CPI). Goods and services that constitute a basket in Ghana: FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) RECREATION (televisions, toys, pets and pet products, sports equipment, admissions); EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories); OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses). Water Sewerage charges, Auto registration fees Vehicle tolls. HEALTH Medical products, appliances and equipment Out-patient services Hospital services TRANSPORT

Purchase of vehicles Operation of personal transport equipment Transport services

C. How often is the CPI Calculated and why?

Ans: The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, clothing, each of which is in turn a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, Ideally, the weights would relate to the composition of expenditure during the time between the price-reference month and the current month. There is a large technical economics literature which would approximate this and which can be shown to approximate what economic theorists call a true cost of living. Such an index would show how consumer expenditure would have to move to compensate for price changes so as to allow consumers to maintain a constant standard of living. Approximations can only be computed retrospectively, whereas the index has to appear monthly and, preferably, quite soon. The index reference period, usually called the base year, often differs both from the weightreference period and the price reference period. This is just a matter of rescaling the whole timeseries to make the value for the index reference-period equal to 100. Annually revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period. Calculating the CPI for a single item

Where 1 is usually the comparison year and CPI1 is usually an index of 100.

Alternatively, the CPI can be performed as . The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread in 1982) is divided by the initial year (the price of bread in 1970), then multiplied by one hundred. Calculating the CPI for multiple items Example: The prices of 95,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: Housing: 41.4%, Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Other: 6.9%, Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI computation.

The CPI is calculated for many reasons and some of these reasons include the following: Index numbers are used especially to compare business activity, the cost of living, and employment. They enable economists to reduce unwieldy business data into easily understood terms. Measures changes in retail prices paid by consumers Cost-of-living index (COLI) is a price index number that measures relative cost of living over time. Index numbers are used to provide a fairly close approximation to the underlying cost-ofliving index number in a wide range of circumstances Economic data figure reflecting price or quantity compared with a standard or base value.

Q1 D Investigate the problems associated with the construction of index numbers under selection of some items. Ans : The construction of an index number is not an easy task. Various problems hamper the construction of index number such as; what should be the base year, which commodities should be included, how should the weights allocated to each commodity etc. These are some of the problems which make it difficult to construct an index number on regular basis. The important problems of index number are discussed below. 1. Defining Purpose In the construction of index number, the defining purpose is the important step and indicates the purpose of measure to be calculated. Since the choice of weights, commodities, and base year all depend on the purpose of measure therefore it is necessary to define it before the construction of an index number. For example we are constructing two indices i-e. cost of living index and whole sale price index. Here the weights, commodities, and base year of cost of living index will be totally different from the weights, commodities, and base year of whole sale price index. 2. Commodities to be included Selection of the commodities is an important problem in the construction of index number. The commodities should be relevant, comparable, representative and reliable. For example if we are measuring the cost of living of a particular

class then only those commodities should be included which are consumed by the class. Similarly most common or most popular commodities should be used and the quality of these commodities should not vary from each other. 3. Determination of weights When the selection process of commodities is completed, the next step is the determination of weights to each commodity. The determination of weights depends upon the relative importance attached to each commodity. But the importance of a commodity varies with place, time and the habits of those who use or trade in it. Similarly it is also important to decide whether to keep the weights constant or change it periodically. Generally weights are kept constant over a long period of time to facilitate the comparisons. 4. Collection of Prices Collection of prices is also an important problem for the construction of index number. It requires a lot of time and financial resources to collect the information about actual prices on regular basis. For example an index number of people living in villages cannot be constructed with out collecting the prices from retail shops located in villages. Similarly it requires huge human and financial resources to collect the information of hundred of commodities from every major market from time to time. 5. Choice of base Year A base year should be a normal year, because it is the year to which all other are compared. The base year should be free from all hazards that affect the economy of the country e.g. floods, wars, earth quakes etc. If such things happen in a year then the economy of country will be effected which will ultimately effect the prices in the year. Now because the year is not a normal year therefore it cannot be taken as base year. It is therefore necessary to take care while selecting the base year. There are two types of base year. 6. Fixed Base Year It is the year which remains fixed for the comparison of prices of all years. For example 2005 is taken as base year for the comparison of prices of 2006, 2007, and 2008, Now because the prices of the three years are compared with the prices of 2005; therefore 2005 is the base year. The index of base year is 100. It shows that if the index of 2008 is 130 then there is an increase of 30% in prices as compared to base year (2005).

7. Chain Base Year It is the year which does not remain fixed for the comparison of prices of all years. In case of chain base year every preceding year is taken as base year for every proceeding year. For example 2005 is taken as base year for 2006 and 2006 is taken as base year for 2007 similarly 2007 is taken as base year for 2008 and so on.

References: 1. www.statsghana_national_TimeSeries P1_2012jan11gh 2. www.ghanaweb.com//2333index compare 3. www.wikipedia.com_basket

Names and Index numbers of Group Members; 1. S