From the following what is true about price index?

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Examoogle · Accepted Answer

All of the above. Explanation: A price index is a normalized average of price relatives for a given class of goods or services in a given region during a given interval of time. It acts as an economic indicator that quantifies the change in the cost of a market basket, helping to measure inflation or deflation over time. Working Principle: Price indices function by selecting a base year and comparing the total cost of a representative basket of goods and services in a current year against that base year. The calculation follows a weighted average method, where index values are computed periodically to track fluctuations. These indices help economists and engineers normalize historical data to present-day values (money-time relationship) and perform trend analysis. Key Formulas: $PI = \frac{\sum (P_n \cdot Q_0)}{\sum (P_0 \cdot Q_0)} \cdot 100$ — Laspeyres Price Index formula where $P_n$ is current price and $P_0$ is base price.; $Infl = \frac{Index_{final} - Index_{initial}}{Index_{initial}} \cdot 100$ — Percentage change in price index representing inflation rate. Key Points: Price indices are dimensionless figures used to compare price levels across different periods.; They serve as essential tools for adjusting contracts, wages, and pension payments to maintain purchasing power.; The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are standard indices used globally. Advantages: Simplifies complex price movements into a single numeric indicator.; Facilitates the calculation of real income vs. nominal income. Disadvantages: Often fails to account for quality improvements in goods (substitution bias).; May not reflect individual spending patterns correctly. Applications: Economic policy formulation and interest rate adjustment.; Engineering cost estimation and project budget escalation planning. Additional Info: The Base Year index is typically assigned a value of 100.. Option C is correct because technical forecasting (regression analysis) often utilizes historical price index time-series data to predict future trends in materials and labor costs. Answer: D is correct — A price index effectively tracks price fluctuations, provides historical data, and facilitates future price forecasting for economic and project planning. Exam Tip: When solving Engineering Economics problems, always check if the given 'Price Index' applies to labor, materials, or general utility, as indices vary significantly by category.

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