It is the most fundamental and popular type of index number which is understood by a common man. This index number, ordinarily, measures the changes in a price level of the current period on the basis of the price level of a base period. Its simplest formula is as follows:
P01 = (P1 x 100 ) P0
Where, P01 = Price index of the current year on the basis of the base year’s price of a particular commodity.
P1 = Price of the current year
P0 = Price of the base year, and
100 = Technique of common denominator.
Price index number is again, of two types depicted as under:
(a) Wholesale Price Index Number
This index number measures the changes in the general price level of a country after an interval of certain number of years. For this purpose, wholesale price quotations of the representative items included in the index number are obtained from the different whole-sale markets of the country.
It takes a lot of time and needs a heavy establishment for collection and compilation of the required data for which it is not possible to construct such an index number every year. It is not noted here that the first wholesale price index number of India was constructed by the Ministry of Commerce in 1947 on the basis of the price level of 1939. The latest wholesale price index number was constructed on the basis of the price level of 1970-71 with 139 items and 774 price quotations obtained from 2125 wholesale markets.
(b) Retail Price Index Number
This index number measures the changes in the price level of a particular sector, or a community. For its construction, both the retail prices and the quantities of a set of commodities consumed mostly by the people of the community are collected. Consumer price index numbers and cost of living index numbers fall under this category of index number.