Index is the representation of the value of a group of items relative to it's base value. The common indexes we come across are inflation index and stock index.
A particular year is decided as the base year for an index. For this base year, the index is assigned a value, typically 100.
Where 100 is the index value in the base year,
Index value in year x=Price of goods/stock in base yearPrice of goods/stock in yearx×100
Therefore, percentage change in index value in a year will be the same as the percentage change in price of items in that year.
6.1 Inflation Index
In India, inflation is measured with Consumer Price Index (CPI) and Wholesale Price Index (WPI). As the names suggest, they track the rise in prices for consumers and wholesalers respectively. Any additional detail such as computing the index value or determining the basket of goods is outside the purview of CAT.
Example 20
Increase in Consumer Price Index (CPI) is considered inflation. CPI in 2016 and 2017 were 127 and 132 respectively, wherein the CPI in the base year of 2012 was 100. What was the annual inflation rate and 5-year inflation rate for 2017?
Solution
CPI2012 = 100, CPI2017 = 132
Inflation over 5 years to 2017 = 100132−100×100%=32%
CPI2016 = 127
Inflation over 1 year to 2016 = 127132−127×100%=3.94%
In the above example, note that the consumer price of the basket of goods could be numbers like 15789 and 16541 in 2016 and 2017 respectively. For a lay man without a calculator, these numbers are difficult to deal with.
As we are only concerned with the inflation or increase rate, dealing with simpler numbers with a base of 100 makes understanding easy. And, this is the primary reason for using indexes.
6.2 Stock Index
Companies require capital (or investment) to operate. These investments are made by the promoters or founders of the company. In several cases, they seek outside help and raise capital from other investors.
Big companies raise capital (or investments) from the public. This is done by issuing shares (also called stock, equity, equity shares, etc.) to the public in exchange for money paid as capital. This or these shares indicate a certain ownership in the company.
Stock exchanges have been setup for the public to buy and sell shares in companies that are listed with the respective stock exchanges. The two major stock exchanges in India are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Their respective stock indexes are NIFTY and Sensex. These indexes have different basket of stocks and different weights assigned to them (which is outside the purview of CAT). Now, you should be able to understand the details of Sensex written below.
Sensex uses the base year as the financial year of 1978-79, wherein Sensex = 100 on April 1, 1979.
Sensex on April 1, 2018=33030
Increase in Sensex over 39 years = 10033030−100×100%=32930%
Example 21
Share price of Company X was Rs. 85 in 2010. If the company's price has always followed the NIFTY, then what was share price of X in 2018 if the NIFTY stood at 5100 and 10500 in 2010 and 2018 respectively?
Solution
Let the price of stock X and value of NIFTY in year n be Xn and NIFTYn respectively.
As X has followed the NIFTY,
X2010X2018=NIFTY2010NIFTY2018
⇒ 85X2018=510010500
⇒ X2018=175
Answer: Rs. 175
Note that questions with inflation or indexes in the entrance will explain these concepts. However, a good understanding of these will give you an edge. You could also have a Data Interpretation case around these.
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