The following are main steps in the construction of cost of living index numbers.
(a) Object and scope.
(b) Conducting family budget survey.
(c) Obtaining price quotations.
(d) Method of construction.
(a) Object and scope: Decide the class of consumers for which index number is required. Such as whether index number is meant for govt, employees, bank employees, merchants, farmers etc. Also the geographical location as that of city, town, or a community of people who are having the similar consumption pattern.
(b) Conducting family budget survey: A sample survey regarding the average expenses of familities on various items of consumption is conducted. In the survey, the information regarding commodities consumed by the families, their quality and the respective budget is collected. The items included are under the heads of i) food (ii) clothing (ii) fuel and lighting and (iii) miscellaneous Each of these can be divided into smaller groups as food may be include wheat, rice, dhal etc which are consumed by the people for whom index is meant.
(c) Obtaining price quotations: While constucting the cost of living index number, retail prices of commodities are to be collected. The price lists are obtained from different agencies from different places. Then, they are averaged and these averages are used in the construction of index numbers. Here price lists of current ** as well as base ** should be collected.
(d) Methods of construction: There are two methods of construction. (i) Aggregative expenditure method (A.E.M)
(ii) Family Budget Method (F.B.M).
Price.
