BCom 3rd Year Financial Value Money Index Number Study Material Notes In Hindi

BCom 3rd Year Financial Value Money Index Number Study Material Notes In Hindi: Meaning of Value of Money Meaning of Index Number Methods of Construction of Index Number Simple Index Number Weighted Index Number  Types of Index Number Advantages of Uses of Index Number Limitations of Drawbacks of Index Number Exercise Questions.

BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi

VALUE OF MONEY AND INDEX NUMBER

MEANING OF VALUE OF MONEY

The value of money means all is related with its exchange value. Apart from exchange value of money it has no other independent value. In other words. the money is always related with its exchange value. As we know the eye whether of human person or animal does not have its own light, similarly the eye can see only with either by artificial or natural light. In the same way, the value of money can be judged or preceived only when it is related with its power of purchase. In the words of Crowther “The value of money is what is will buy.” In other words the value of money depends on its purchasing power. In this connection the other definition of Robertson may also be referred. As per this definition—”The value of money means the amount or things in general which will be given in exchange for a unit of money.”

In this way the value of the money depends on its purchasing power either of a commodity or other services. It is also evident that the value of money and value of commodity has opposite relationship. This means when there is an increase in the value of commodity, the value of money will decrease. The above discussion may be made clear by an example. Suppose in a particular situation by one unit of money 5 oranges or 1 kg of sugar can be purchased. This means that the one unit of money is equivalent to 5 oranges or one kg of sugar. Now the value of any or all things take and increasing position then the value of money will certainly decrease. In other words, if 1 kg of sugar was available for Rs. 2 only where when the value of sugar is available for Rs. 3, that it can be presumed that the initial power of Rs. 2 did not remain so much that 1 kg of sugar can be purchased with old value. This means that in case of increase the value of money will be to the diminishing power of purchase. So, it is proved that there is opposite relationship between the power of money and the commodity.

Now the significant question arise that when the differences between the value of commodity and the value of services appear different, then in what way the base value can be judged because of the fact the difference between the retail price and the wholesale price. The solution of such problem has been found out on the following three consecutive :

Financial Value Money Index

(1) Wholesale value: Whatever value becomes prevalent in the wholesale bet is usually taken as wholesale value. So, the wholesale value is easy to

Value of Money and Index Number 35 be found out because the value of money usually is displayed on this very base. This is called the wholesale value of the money.

(2) Retail Value : The value prevalent in the retail market is called as retail value. But the retail value may be perceived separately on different places. This means the retail value will remain constant. The calculation of the retail value is always different from one place to another and as such the base of retail price is difficult in comparison to wholesale price.

(3) Labour Value : In order to make payment the money among the labourers the value prevalent in such a market is usually called the value of labour. Now the value of labour will never be constant and it will also vary from place to place. So, it cannot be accepted as a bases of value.

MEANING OF INDEX NUMBER

The index number is really the language of statistical idiom. This is such a statistical tool by which the value of money may be judged in two different periods. This mathematical tool was used for the first time by statistics expert namely G.R. Carly. Then it was developed by Javens, Fisher, Marshal and many other economic experts. In modern times, this is accepted as economic mirror. From the above descriptions, it is made amply clear that there is an opposite relationship between the value of commodity and that of money itself. Along with this we have also seen that the value of money goes on changing. It cannot or never remain constant. On the bases of this we can usually say in a particular year the value of both the commodity and the services has increased. When we say such, it does not become clear as to this value has increased in comparison to what financial year. The question is whether there has been similar increase in all commodities or that has been separate increase among the different commodity in different proportion. As a consequence of all such rise and fall on the economic system, the way to calculate the fact is only way the index number.

This theory of index number may be understood by the definitions of a number of scholars :

(1) According to Prof. Chandler, “The index number of prices is a figure showing the height of averages prices at one time relative to their heights at some other time that is taken as base period.”

Financial Value Money Index

(2) According to H. Secrist, “Index numbers are series of number which shows variations in price level with these in the value of money. These are relative numbers which enable us to compare the purchasing power of money as different periods of time and measure the movements in the level of price.”

In this way the above definitions make it clear that the index number is really a way of measurement in the value of money at two different periods of time. If this index nun:ber takes an increase, it means that there has been a higher increase in the value of both services and commodiuies in comparison to the base year. In other words, there has been a central tendency of increase in the price of commodity and also there is a tendency of decrease in the value of money. The opposite situation is—-if index number takes a decreasing form this means there has been a fall in the price level of the base year. In other words, a central tendency is perceived in the rising value of commodity.

By above analysis it is now amply clear that the index number at one hand points out the change in the value of money anil on the other hand this also indicates the possible change or the future change in export and import alan with the rate of production.

METHODS OF CONSTRUCTION OF INDEX NUMBER

Prior to prepare the index number it is necessary to determine first as to why this index number is being prepared. In other words, the aim and object for preparing the index number should be determined. Generally there are turn Obvious objects for preparing the index number. First, it is prepared in order to Know the changes happening in the price level and secondly, to calculate anticipate the effect failing on the different categories people. While preparing the index number these two facts should always be kept in mind.

(1) Selection of the Base Year: The base year means the particular year by which one studies the price level of one year with others. So, one should keen earnest awareness while selecting the base year. In fact the base year ought to be such a year which should be common or ordinary from all points of view. This means the base year should remain aloof from the uncommon happenings like warfare, flood, political upheavals and famine as well as serious drought. In this connection caution should be taken that the base selected should not be repeated for other years.

(2) Selection of Commodities : While preparing the index number the selection of commodities should be based on the above facts. As the same time it should always be kept in mind that such a sort or selection should represent the attitude and taste of the maximum people. In order to prepare the index number, it is not possible to take into account all kinds of commodities and so one should decide the number of categories with proper understanding and consideration. When all kinds of commodities are taken into consideration together it becomes difficult to prepare the index number. One should also take into consideration the maximum items so as to prepare the index number. As far as possible these items of standard goods should be kept in mind.

(3) Selection of Prices : The selection of the prices of goods is also an important factor to prepare the index number. We know that there are two kinds of values of commodity. First, the retail price and second the wholesale value. It is easy to make selection of the wholesale value and there is usually as uniformity in the different sphere. But there are variations in determining the retail price due to variations in the place and time. So, in order to prepare the index number, usually the wholesale value is taking into consideration. Apart from this, while selecting the values one should also take care of its objects. If the cost of living is to be determined while preparing the index number the consideration of retail value is relatively more proper.

(4) To Represent Prices in Percentages : While preparing the index number the value of the representative commodities is expressed in terms of percentage. So, the value of every representative commodity of the base year is accepted as 100 only and according to this the value of the commodity of the index year is shown in terms of percentage. For example, if the price of rice is 450 per quintal, then it should be expressed as 300 only in the same year because of the fact that there had been a three time increase in the price of the rice. This is also called as price relatives.

(5) To Find Out the Average : The way of knowing the average is by adding the relative prices of the last two years separately and then the number of Commodity is divided so as to know the average. If the average price is more, than the average price in the base year then we can say that there has been an increase in the price level. On the other hand, if the situation appears to be opposite, then we can say that there has been a fall in the price level.

Financial Value Money Index

SIMPLE INDEX NUMBER

The method of preparing the index number is now being shown through the following table. This table is framed on the bases of 100 the current year of the representative commodity and thereafter the average price is shown in terms of index number.

SIMPLE INDEX NUMBER

Financial Value Money IndexThe above table amply makes it clear that the index number is 100 only for the base year 2003 and this went on increasing for 140. This means that there has been an increase of 40% in the current year 2012 in comparison to the year 2003.

WEIGHTED INDEX NUMBER

The simple index number is based upon the face that all the representative commodities have equal or parallel values. But it is not possible in the practical life. Every one does not give the equal value of all things whatever he uses in the daily life It is also clear that a person spends money according to the value that he attaches to a commodity or commodities. So while preparing the index number one does not give equal value to all commodities. In preparing the index number the weight of a particular commodity is taken into consideration. Then, the relative value is multiplied by the weight so as to know about the weighted index number. The weighted index number does give light to wipe out the defects of simple index number. This is made clear with the help of the following table.

The above table makes it clear that the weighted index number if supposed to be 100 in the base year 2003 will be now 165.9 in the current year 2012. This! means that in comparison to base year 2003, in current year 2012 price level is increased 65.9 percent if the simple index number is prepared on the same data then the result will differ because weight is not given in preparation of simple index number according to the importance of commodities.

DIFFICULTIES IN CONSTRUCTION OF INDEX NUMBER

Generally speaking one has to face the following difficulties in construction of index number:

(1) Difficulties in Selection of Base Year: In preparing the index number any particular year is selected as the base year. However there is a specific difficulty in the selection of such year whatever the standard are fixed in doing so because of the fact that on practical level no such year is available in which either political or economic or natural happening has not taken place. Still then one has to keep in view in selecting the base year that minimum such occurences have taken place. This is the only leading role of selecting the base year.

(2) Difficulties in Selection of Representative Commodity : While preparing the index number there is also some difficulty in preparing the index number out of the things taken into consideration out of the representative things. The reason is that those representative things taken into consideration during the base year they become out of use. Apart from this the valuation also takes in the quality as well as the establishment of the things because of the changes in aptitude of the people according to their income. So the difficulty naturally rises in the selection of the representative thing because of these factors.

(3) Difficulty in Collection of Price: There are two kinds of value of any commodity-the retail price and the wholesale price. In the collection of the wholesale price the difficulty is not so great. But in the collection of retail price there is much difficulty because of the variation in the prices at different places. If the wholesale price is taken as the base, then consumer cost index number cannot be prepared.

(4) Difficulty in Deciding Weight : While preparing the weighted index number. weight of commodities is given according to the importance of the commodity. But different commodities are of different importance for different neople. As a result of this it is very difficult to decide the actual weight

(5) Difficulty in calculating the Average : While preparing the index number to calculate the average is also a big problem. It has to be decided either arithmetical average or geometrical average is calculated. The average emerged from both these give different results. That is why it becomes very difficult to decide as to which method should be applied.

Conclusion : Looking at the above difficulties it cannot be said that the index number should not be prepared. It is true that the index number cannot be complete truth but it is certainly close to the truth. So, it is important to prepare the index number to anticipate changes in the value of money.

Financial Value Money Index

TYPES OF INDEX NUMBER

The following are the principle types of index number.

(1) Wholesale Price Index Number: The Wholesale price index number is prepared on the bases of the wholesale price. In order to measure the changes in the purchasing power of money generally wholesale price index number is used. This index number is prepared on behalf of the government of India.

(2) Cost of Living Index Number: This index number helps to estimate the increase or decrease in the cost of living of human beings. In order to prepare this index number maximum commodities are considered and weights are given as per their importance. In doing so generally the retail price is taken into consideration because this value is in fact the cost value of the consumer. No doubt the collection of retail prices is a difficult job so it is difficult to prepare the cost of living index number.

(3) Industrial Index Number: This of index number is prepared to measure the changes in the industrial production. To prepare this index number, the production of different industries of a particular year is taken as base. Then it is measured with the changes of industrial production of other years. Today, most of the countries of the world prepare this index number.

(4) Import-Export Index Number: In order to studys the tendency of foreign trade the import-export index number is prepared. With the help of this index number, favourable or adverse balance of foreign trade is known.

(5) Security Price Index Number : The security price index number is prepared to know the changes in prices of government and industrial securities. This ndex number helps to decide the rate of dividend.

(6) Trade Index Number: Trade index nymber is prepared to know the tendency of national or international business. In this number, foreign trade is also included.

On the bases of above kinds of index number it can be said that it reflects not only the changes in price but it is also considered as the economic mirror of a country.

Financial Value Money Index

ADVANTAGES OR USES OF INDEX NUMBER

The following are the main advantages of index number:

(1) Measurement of Change in Value of Money : With the help of the index number the value of money in two different periods is measured, which reflects the effects on different classes of people in society due to the change in the value of money. The index number is very useful to suppress the inflation and deflation. It is also considered important to determine the direction of production and employment.

(2) Knowledge of change in Standard of Living: The standard of living! of the people depends on their real income. It is possible that the monetary income may increase due to the increase in price level but real income does not increase. As a result the standard of living becomes low. On the contrary, the standard of living goes up due to fall in the price level. In this way, the index number helps to know the changes in the real income; from which one gets knowledge about the standard to living of the society.

(3) Useful to Businessman: The businessman knows the changes in the price of commodities and quantity of production with the help of index number On the bases of these informations a perfect business policy can be determined

(4) Knowledge Regarding Foreign Trade : The index number related with export and import provides information about foreign trade. On the bases of this information proper foreign trade policy can be framed.

(5) Useful to Government: The government has to prepare the monetary policy and the taxation policy. The index number helps a lot in the decision of these policies. In other words, the government tries to provide a proper direction in the matter of employment, production, income, investment etc.

(6) Fixation of Allowance: Allowances are given to the employees by the employers to meet the specific expenses. For example, the dearness allowances, the conveyance allowance, the travelling allowance and so on. The amount of allowances is fixed with the help of the index number. As a result there is always a cordial relation between the labour and capital.

(7) Useful to Politicians : Politicians get an exact knowledge of the economic scenario of the country with the help of index number. One can put a proper economic proposal before the government in any democratic country.

In this way it is amply clear that the index number provides advantages to all sections of people in the society. The index number is very useful tool to create ones position on the economic scenario of the whole world.

LIMITATIONS OF DRAWBACKS OF INDEX NUMBER

The index number no doubt has certain theoretical drawbacks also. The main drawbacks are as follows:

(1) Not Completely True: The index number does not provide complete truth whatsoever precautions is taken in the preparation of the index number. On the bases of this the tendency of changes in the value of money is estimated. Bit we cannot depend on this.

(2) International comparison is impossible : The index number does not help in the international comparison. The reason is that the index number is prepared in different countries on different bases.

(3) Difficulty at Interval of Time : The interval of time may also bring change in the taste and fashion of the people. In index number the current year is compared on the bases of the base year. If there is a long gap of time then while preparing index number the new commodities cannot be compared with old one.

(4) Specific objectives: Ifindex number is prepared for a particular purpose, the same cannot be used for other purpose.

(5) Defective Weightage: In the preparation of the weighted index number, the weight is given on the importance of commodities have actually no scientific base. So, the person who prepares the weighted index number adopts unscientific method and as a result of this the index number does not provide the correct result.

(6) Lack of Retail Price Index Number : The difficnlties an preparing retail value, only the wholesale value of index number i But in actual life there is a great importance of retail value.

Thus , Despite of many Shortcomings Index number Is Very Useful for a Country Prosperity .

EXERCISE QUESTIONS

Long Answer Type Questions

1 What do you mean by value of money? How do you measure the changes in the value of money?

2. What is an index number? How is it constructed ?

3. What is an index number? Explain its utility and limitations.

4. What do you mean by index number? What are the difficulties in the construction of an index number?

5. Describe the different types of index number

Financial Value Money Index

Short Answer Type Questions

1. What is simple index number?

2. What is weighted index number?

3. What is wholesale price index number?

III. Objective Type Questions

Choose the correct option

1. In the preparation of index number, which of the following is necessary ?

(a) Selection of the base year

(b) Collection of prices

(c) To determine the weight

(d) All the above

2. Difficulties in the preparation of the index number is :

(a) Lack of time

(b) Lack of money

(c) Lack of appropriate person

(d) Selection of the base year

3. What kind of situation is anticipated by retail price with regard to total demand and supply? (a) The economy

(b) Producer

(c) Consumer

(d) None of the above

4. The base year should be:

(a) Normal year

(b) Abnormal year

(c) Any year

(d) Election year

5. The index number is …….

(a) Political tool

(b) Mathematical tool

(c) Social tool

(d) None of the above

6. Which of the following is correct in Weightage Index number?

(a) Equal importance is given to all commodities

(b) Weights are given in the commodity in accordance with their importance

(c) Weight is given only in some special or particular commodity

(d) The preparation is made only by some distinguished persons.

(Ans. 1. (d), 2. (d), 3. (a), 4. (a),5. (b), 6. (b).]

Financial Value Money Index