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CA Foundation · Quantitative Aptitude · Index Numbers

A cost of living index with base 2010 = 100 uses a basket of goods fixed in 2010. By 2024 smartphones and online streaming have become common items of household spending, but they are not in the basket. What is the main problem this creates?

The index becomes outdated because the fixed basket no longer reflects current consumption, so it may misstate actual price changes faced by households. New goods like smartphones are omitted, which is the problem of obsolete items and changing patterns that limits long-term index comparisons.

  1. AThe index becomes outdated because the basket no longer reflects current consumption, so it may misstate price changesCorrect
  2. BThe index will necessarily show a value of exactly 100
  3. CThe index will fail the time reversal test
  4. DThe index will become a quantity index instead of a price index

Explanation

Consumption habits change over time, and new goods appear while old ones fade. If the basket is not revised, the index measures the price change of an obsolete basket and does not represent present spending. The time reversal test is a property of the formula, not of basket staleness, and the index remains a price index.

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