Price Indexes
On the basis of given passage answer the following questions:
There is another way to measure change of prices in an economy which is known as the Consumer Price Index (CPI). This is the index of prices of a given basket of commodities which are bought by the representative consumer. CPI is generally expressed in percentage terms. It is worth noting that many commodities have two sets of prices. One is the retail price which the consumer actually pays. The other is the wholesale price, the price at which goods are traded in bulk. These two may differ in value because of the margin kept by traders. Goods which are traded in bulk (such as raw materials or semi-finished goods) are not purchased by ordinary consumers.
Like CPI, the index for wholesale prices is called Wholesale Price Index (WPI). In countries like USA it is referred to as Producer Price Index (PPI). Notice CPI (and analogously WPI) may differ from GDP deflator because the goods purchased by consumers do not represent all the goods which are produced in a country. GDP deflator takes into account all such goods and services. CPI includes prices of goods consumed by the representative consumer, hence it includes prices of imported goods. GDP deflator does not include prices of imported goods. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator.
Which one of the following index measures the basket of commodities purchased by the consumer?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Consumer price index
To see how the cost of living changes, statisticians take a fixed basket of commodities that a typical, or representative, consumer buys, and compare what the basket costs this year with what it cost in a base year. That ratio, usually in percentage terms, is the Consumer Price Index (CPI); since it follows the prices consumers actually pay, it is the usual measure of the cost of living.
Why the other options are incorrect
Option (1) Wholesale price index — Incorrect. The WPI is built from wholesale prices, the prices at which goods are traded in bulk. It is not based on the basket bought by consumers; goods traded in bulk, such as raw materials, are not bought by ordinary consumers at all.
Option (3) GDP deflator — Incorrect. The GDP deflator, the ratio of nominal to real GDP, covers all the goods produced in the country, not a consumer’s basket, and its weights change with the output of each good.
Option (4) Producer price index — Incorrect. This is the name used in countries like the USA for the wholesale price index, so it measures bulk prices, not the consumer’s basket.
Note 1: This passage is taken almost word for word from the National Income Accounting chapter of the NCERT book. Read the chapter right to its end, the price indices included. This passage is the book’s own page with a new heading on top, so a careful reader had seen every answer before the paper was handed out.
Note 2: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 13-05 S2* 31-05 S1 | 13-05 S1* 14-05 S1* | – | – | – |
* A similar question.
NCERT (2025-26): “2.4 Nominal and Real GDP … There is another way to measure change of prices in an economy which is known as the Consumer Price Index (CPI). This is the index of prices of a given basket of commodities which are bought by the representative consumer. CPI is generally expressed in percentage terms. We have two years under consideration – one is the base year, the other is the current year. We calculate the cost of purchase of a given basket of commodities in the base year. We also calculate the cost of purchase of the same basket in the current year. Then we express the latter as a percentage of the former.…” |