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CA Foundation · Quantitative Aptitude · Index Numbers

A cost of living index is constructed for textile mill workers in Coimbatore using a basket fixed in 2010. By 2024, consumers have largely shifted from some items in this basket to new products not included in it. Which problem of index numbers is most directly illustrated?

The problem is that the fixed basket becomes outdated. When consumers shift to new products and drop old ones, the commodities in the base-year basket no longer represent current consumption, so the index loses reliability over long periods.

  1. AThe basket becomes outdated, so the index no longer represents current consumption patternsCorrect
  2. BThe index suffers from the time reversal test failing
  3. CThe index has an error because of the choice of the geometric mean
  4. DThe index cannot be converted to a different base year

Explanation

When consumption habits change and new items appear, a fixed old basket no longer represents current spending, so the index becomes less reliable over a long period. The other options concern formula tests, averages or base shifting, which are not the issue described here.

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