Question

Which index number is used to compare cost of living at two different cities?

• A. Value index
• B. Volume index
• C. Weighted index
• D. Consumer price index

Answer 1

The Correct Option is D

The index number commonly used to compare the cost of living between two different cities is the Consumer Price Index (CPI). The CPI measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

1. Defining CPI:
   The Consumer Price Index is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. It represents the cost of a basket of goods and services purchased by households.
2. Purpose:
   The primary purpose of the CPI is to compare the cost of living between different locations or over time. It is widely used for economic analysis and is key in the decision-making processes related to economic policy.
3. Calculation Method:
   The index is calculated by comparing the current cost of the basket to the cost in a base year. The formula can be expressed as:
    CPI = (Cost of Basket in Current Year/Cost of Basket in Base Year) × 100
4. Use in Comparison:
   By comparing CPIs of different cities, one can deduce the relative cost of living. A higher CPI in one city compared to another suggests a higher cost of living.

Hence, to compare the cost of living at two different cities, the Consumer Price Index is the appropriate index number to use.