CA Foundation · Quantitative Aptitude · Index Numbers
A wholesale price index is used to adjust the wages of workers in a textile mill, but the workers' actual spending is mostly on food, rent and transport, which have small weight in the wholesale index. What limitation of index numbers does this illustrate?
This illustrates that an index number is not suitable for purposes other than the one it was constructed for. A wholesale price index has weights reflecting wholesale trade, not workers' spending on food, rent and transport, so it misrepresents their cost of living when used for wage adjustment.
- AIndex numbers are not suitable for a purpose other than the one for which they were constructedCorrect
- BIndex numbers always measure quantity changes only
- CIndex numbers cannot be computed for wholesale prices
- DIndex numbers are valid only for a one-year period
Explanation
Every index is built for a specific purpose, with weights and items suited to that purpose. A wholesale price index reflects traders' price changes, not the retail spending pattern of workers, so using it for wage adjustment misrepresents their cost of living. A consumer price index would suit this use.
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