Which of the following indices necessarily gives higher weights to services like doctor fees, railway and bus fares?

Question

Accepted Answer

The correct option is 1:

The Consumer Price Index (CPI) is fundamentally designed to measure the changes in the price level of a basket of consumer goods and services typically purchased by households. Since services like medical care (doctor fees) and transport (railway and bus fares) constitute a significant and mandatory part of household expenditure, the CPI necessarily incorporates and assigns weights to these items. Its purpose is to track the impact of inflation on the end consumer, which inherently includes the rising cost of services, making it the most appropriate measure for reflecting service price changes.

The incorrect option is 2: Wholesale Price Index

The Wholesale Price Index (WPI) tracks price changes at the wholesale level, focusing primarily on goods (manufactured products, primary articles, and fuel/power). The WPI generally excludes the price of services entirely, as services are not typically traded in bulk at the wholesale stage. Therefore, it does not include items like doctor fees or bus fares in its calculation basket.

The incorrect option is 3: Index of Industrial Production

The Index of Industrial Production (IIP) measures the growth rate of different industry groups in the economy. It focuses on the volume of output (production quantity) in sectors like manufacturing, mining, and electricity, and is not a price index. Consequently, the IIP is entirely unrelated to measuring the price changes of consumer services.

The incorrect option is 4: GNP Deflator

The GNP Deflator (or GDP Deflator) is a broad-based index that measures the price level of all new, domestically produced, final goods and services in an economy. While it includes services, it is much broader than the CPI, covering capital goods, government purchases, and exports in addition to consumer purchases. It is not specifically weighted toward the consumer basket of services in the same focused way as the CPI.