Transfer of Ownership under Sale of Goods Act – Meaning and Rules

 Q. What do you mean by “Transfer of ownership”. Give the rules relating to transfer of ownership under Sale of Goods Act. 

Ans. Meaning of Transfer of ownership: Transfer to ownership implies the transfer of all rights to the property in goods from seller to the buyer by virtue of which the buyer can use the goods as he desires, and this right of buyer cannot be restricted. 

For example, Ram gives his watch to Shyam on ‘approval or return’ basis, and allows him to keep it for ten days, and buys it if he likes it, otherwise return the watch. Here Ram has only given the possession of the watch to Shyam; he has not transferred his ownership. If, after ten days, Shyam wants to buy the watch and pays its price to Ram, the ownership will be transferred and Shyam will become the owner.

Transfer of ownership from the seller to the buyer is important in a contract of sale for the following reasons:

(i) Risk follows ownership: The fundamental principle of law is that risk and ownership are co-existent— one follows the other even if there is no transfer of possession. If the goods are damaged or destroyed by any reason, the loss is the owner’s even if he is not in possession of goods at that time. The transfer of ownership in a sale deal is vital because it defines the rights and obligations of the seller and the buyer. Risk follows ownership whether or not a transfer possession of goods has taken place. In case of a delay in the delivery of goods because of a default on the part of the buyer or the seller, the goods are at the risk of the defaulter. 

(ii) Action against third parties: If the goods are destroyed or damaged by any action of a third party only the owner of goods can initiate any proceedings against the third party.

(iii) Insolvency of the seller or the buyer: In case of insolvency of the seller or the buyer, it becomes important to know if the official receiver can take over the goods. This depends on who becomes involvement and who is the owner of the goods — the seller or the buyer. 

Rules: The transfer of ownership from the seller to the buyer can be discussed under the following headings: 

(a) Time when the property changes hands: Normally, it is agreed between parties when transfer will take place, but, in the absence of such agreement, the act stipulates when the transfer of ownership will deemed to be affected in a sale contract.  As per the provisions of the act, the transfer of ownership depends on the type of goods sold, and each type has different rules governning such transfer. The types of goods are:

(i) Ascertained or specific goods

(ii) Unascertained or generic goods

(iii) Goods sent on approval or sale or return

(i) Passing of property in ascertained goods: Ascertained or specific goods refers to such goods that have been identified or specified by the parties at the time of making the contract, and the seller does not have to make any modification or addition to the goods. In this case, both parties, i.e., the seller and the buyer, know specifically what the goods are and what is the quantity for which the transfer of ownership is to take place. For example, A says to B that he wants to buy the blue jar that is displayed in the show window of B’s shop. In this case, both parties have clearly identified the ‘goods’ that is to be sold. Ascertain goods are available with the seller at the time of the contract.

According to Section 19, if the contract of sale is about a ascertained or specific goods,  and the parties to contract have agreed to the terms of the sale, in the absence of contract to the contrary, the transfer of ownership will be affected according to the following rules:

– When the goods are in a deliverable state: Goods are deemed to be in deliverable state when the buyer agrees to accept the delivery of goods and the goods are in a condition that they can be delivered. According to Section 20 of the Sale of Goods Act, when the contract is about the sale of a ascertained goods which are in a ‘deliverable state’, the ownership of goods is transferred to the buyer when the contract is made, if the contract is unconditional.  Whether the payment of goods or the delivery thereof,  or both, are postponed to a later date does not affect the transfer of ownership. For example, A offers to buy B’s horse for ₹2,000, and B accepts the offer, but the horse dies before it is delivered from B to A. The loss in this case will be A’s, and he will have to pay price to B because the ownership of the horse was legally transferred to B when the contact was made. 

– When specific goods need to be put in a deliverable condition: According to Section 21, when the contract of sale is for such ascertained goods, which are not in a deliverable state, and the seller is required to do something to bring the goods into a deliverable state, the transfer of ownership is not affected till such time as the necessary work has been done on the goods, and the buyer has been informed about it. For example, A buys a gold ring from B which will be delivered to A only after it has been polished. The ownership of the ring will only be deemed to be transferred to A when it is been polished and B has informed A that the ring is in a deliverable state. 

– When the seller has to do something for ascertaining the price: According to section 22, where the sale contract is about such ascertained goods which are in a deliverable state but the seller needs to assertain their price – by measurement, weightage or doing any other act on the goods – the ownership cannot be transferred till such time that the seller has ascertained the price of goods and communicate the same to the buyer. If anything remains to be donn with the goods, the ownership of, and the risk of damage to, the goods remains the seller’s. For example, A makes a contract to sell 200 books to B. The books are stored in racks and A has to select the titles and separate them before they can be delivered. If there is a fire and the books are destroyed, the loss of the loss will be A’s because the ownership of the books has not yet been transferred. 

(ii) Passing of property in unascertained goods: According to Section 18, if the contract is for the sale of unascertained goods, the transfer of ownership is not affected till the goods have been ascertained. Unascertain goods refer to such goods that have not been identified when the contract is made; only a description of the goods has been given in the contract. For example, A contacts to buy a sheet of glass of a particular size and thickness from B’s godown. The ownership of the sheet is not transferable to A until he selects or identifies the sheet that he wants to buy. The ownership of an unascertained goods cannot be transferred till such time that the goods are ascertained. The rules governning the transfer of ownership of unascertained goods are as follows:

– Goods must be ascertained: According to Section 18, when a contract is made for the sale of unascertained goods, the ownership is not transferable to the buyer till such time that they are ascertained. Ascertained here implies that, if the goods have not been manufactured, they need to be manufactured; and if they have not been procured, they need to be procured. 

– Goods must be appropriated: By appropriation is meant the separation of goods to be sold from other goods. When there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriate to the contract either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in goods thereupon passes to the buyer.” Such assent may be expressed or implied and may be given either before or after the appropriation is made. 

– Goods must be delivered to the carrier:  Where the seller delivers the goods to the buyer or to a carrier or other bailee for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. 

(iii) Passing of property in case of goods sent on approval, or on sale or return: According to Section 24, when the goods are delivered to the buyer for his approval on sale or return basis, or, on some other normal condition in practice, the transfer of ownership to the buyer can be affected as under:

– When the buyer expressly communicates to the seller his acceptance of goods or does something to indicate his acceptance, the transfer of ownership is completed.

– When the buyer does not indicate his acceptance of goods to the seller but retains the goods without communicating his dispproval to the seller or, if a time limit has been fixed for approval, at the expiry of the time, or within a reasonable time if no limit has been fixed, the ownership is deemed to be transferred to the buyer. What is reasonable time, depends upon the circumstances of the case. 

Example: Ram delivers his car to Shayam on 1 January on the condition that, if he likes the car, he should communicate his approval to Ram by 10 January or return the car. If shayam does not communicate his approval even after that date, and does not return the car, his approval is implied and Ram is entitled to receive the payment for the car. 

(b) Reservation of the right of disposal: The Latin for ‘the right of disposal’ is jus disponendi. When the goods sold to a buyer who is far away and the goods id despatched to the buyer by public transport, in order to ensure that he receives the payment for the good, the seller reserves the right of disposal. 

Normally, if the goods are delivered to the carrier and the Bill of Lading or the Railway Receipt is taken in the name of the seller or agent, it is presumed that the seller has reserved the right of disposal, and any damage to the goods in transit is borne by the seller. Section 25(1) lays down that, when a contract of sale is made for specific goods and the goods are delivered after the contract is made, under the terms of the contract of delivery, the seller is entitled to reserve the right of disposal till such time as such terms are met. In such case, even if the seller has dispatched the goods to the buyer, he retains the right of ownership of goods till the conditions of the contract are satisfied. When the goods are delivered to shipping company or the railways, the seller sends the Bill of Lading or the Railway Receipt along with other documents to the buyer through his agent or bank with instructions that these be delivered to the buyer only when he has made the payment for the goods. In this way, the seller reserves the right of disposal of goods.

Personal Selling – Meaning and Personal Selling Process

Q. What is Personal Selling ? Write a detail note on personal selling process.

Ans. Meaning of Personal Selling: Personal Selling is an important part of the promotion mix. It is an important and most effective method of selling. It is the process of assisting and persuading a prospective buyer to buy a product in a face to face situation. It is a major promotional tool used to increase profitable sales by offering wont satisfying products to the customers. 

It renders valuable services to consumers, producers and the society. It is a effective form of direct sales promotion, involving face to face relationship between sellers and the potential customers. The objective is not only to sell the product but also to make permanent customers. Personal sellings is very much essential for the survival and growth of business. 

According to Richard Buskirk, “Personal selling consists of contacting a prospective buyer of a product personally”.

Personal Selling Process: Selling process is the sequence of steps involved in the conversion of human desire into demand for a product or a service. It is purely a psychological process because, the mind of a customer runs through certain mental stages before he makeup his mind to buy a product or service. The selling process differs from salesman to salesman. There are certain steps involved in the personal selling process for the conversion of human desires into demand for a product or service.

The process of personal selling consists of the following steps: 

Personal Selling Process

Pre-Sale Preparations

⬇

Prospecting for Potential Customers

⬇

Pre-Approach

⬇

Approaching

⬇

Presentation

⬇

Demonstration

⬇

Overcoming the Objections

⬇

Closing the Sale

⬇

Follow up

1. Pre-Sale Preparations: The first step in personal selling is the preparation of sale persons. The sales persons must be properly selected,  trained and motivated for the job. Before going in the field, it is essential for the salesman to prepare thoroughly on all the important aspects of selling. He must know who are the prospective customers, what are their problems and solution to their problems. He must know the relative strengths and weaknesses of the product as compared to his competitor’s product. He must know about himself, his company, his product and about the need and desires of the consumers. He should prepare himself about competing brand, the competing products, competitor’s marketing strategies and his selling strategy. Prior knowledge of its product, Company and competitors constitute the essence of pre-sale preparations. 

2. Prospecting For Potential Customers: Prospecting in personal selling refers to the process of acquiring basic demographic knowledge about the potential customers (i.e. prospects) for the product or services. Prospecting generation consists of obtaining names and addresses of persons, who may turned out to be prospects. Prospect is the person, who has wants to be satisfied and has ability and willingness to buy. 

In this step, the sales person prepares a list of potential customers and tries to identify who really needs the product and has a purchasing power and willingness to purchase. Its purpose to locate the potential buyers and to avoid those who appear to be unprofitable and to make sure that the sales efforts should not be wasted. It should always be remembered that everyone is not a prospective customer.

The prospective customers can be discovered from various sources such as the company’s sales records, customer’s information requests from advertisements, other customers, newspaper announcements, public records, telephone and trade directories, lists of trade associations, past and present customers, etc. 

3. Pre-Approach: Before calling on the prospective customers, the salesperson should try to get information about their nature and behaviour. He must possess the detailed information relating to prospective customers with regard to their education status, income, occupation, their preferences, personality traits, products they are using, brands they are buying, likes, dislikes, etc. This information will help in approaching the prospective customers and making presentation in a better way. Following are the objectives of pre-approach:

(i) To obtain maximum information for planned presentation. 

(ii) To save time and energy.

(iii) To select the best approach to meet the perspective customers. 

(iv) To meet the prospective customers with confidence and enthusiasm. 

(v) To provide additional information.

(vi) To avoid serious mistakes.

4. Preparation: This step also includes a preparation made by the sales person. He must be well dressed, well informed and well equipped with sample of products, sales literature, etc. It also involves the training of sales persons, making them well acquainted with the product, market trends and techniques of selling. Some more information should be given to them about the prospective customers so that he is able to communicate precisely (exactly/accurately) with the prospective. A travelling salesman must get an appointment to meet the prospective customer.

5. Approaching: Approaching the customer means taking the initial contact with the prospective customer. This is the most critical step because the customer’s first impression about the sales person may be a lasting impression that has long-run consequences. This step is based on AIDAS formula. 

Before doing anything else, the sales person must introduce himself and his products to the prospective customer. He has to attract attention of prospective customer to his product. Selling process cannot be developed further as long as the customer is not attracted and ready to give due attention to the sales talk. He should be very polite while approaching and must make the customer realise as to how the product will benefit him, so that he may not have much difficulty at the time of presentation.

A counter sales person should also approach the customer properly to gain his attention. He should make the customer feel that he is getting undivided attention. If the sales person is busy with some other customer, he should assure the new customer that he would be attended very soon. The prospective customer is convinced that he will be rewarding to spend time with him. He should treat the customer and make him feel at home. 

There are four prime methods for approaching the customer:

(i) Reference approach: When the sales person uses the reference letter to approach the customer.

(ii) Introduction approach: When the sales person uses his identity card or visiting card. Give his self introduction and introduces the company under which he is engaged. 

(iii) Product approach: In this, salesperson puts his products before the customer when he meets him. 

(iv) Customer benefit approach: The sales person explains the benefit which a customer can obtain from the product or dealing with the company. 

6. Presentation: Before making presentation, a salesman should try to understand the nature, need and spending power of the customer. The presentation should be such that the customer takes continuous interest in the product. He must be curious to know more about the product, its features, its merits etc. 

The first step in the sales presentation is to get the attention of the customer towards the product. Attention can be drawn by using the following tricks:

(i) Mentioning the names of mutual friends or well known persons. 

(ii) Placing the product sample or visual aids before the customers.

(iii) Allowing the customer to touch, hold or actually use the product. 

(iv) Complementing the customer on the appearance of his store, office, plant or residence.

(v) Demonstration about the use of the product.

Once the customer’s interest has been obtained, the next step is to arouse the interest in his product. The sales person should clearly explain the functions of the product, how it is better than other brands, how it is used, its price, etc. His emphasis is on the benefits of the product to the customer rather than on technical specifications. The success of the sales person depends upon the attitude of the buyer.

7. Demonstration: The next step in the process of personal sharing is giving demonstration. It is the best method of presentation. Through demonstration the customer can be satisfied that the product will satisfy his needs. Demonstration creates desire for the product. The process of demonstration also includes the involvement of the prospective customer. He may also be informed of the special features, merits and benefits of the product. 

The sales person can also show the survey reports, photographs, catalogues, related materials, relevant data, referring to specific problems in other products, free gifts, consumer benefit schemes, etc. The customer must be convinced and interest to possess the product must be aroused. “You and not I” attitude must be followed. 

8. Overcoming the Objections: After demonstrating and explaining the product, its features, price, benefits, etc. the sales person should entertain certain queries from the customer. Queries and objections should not be considered to be an unpleasant task. A sales person should realise that it is the golden opportunity to convince and persuade the customer. This also gives him a chance to give some additional information about the superiority of the product over the competitive products in the market

The sales person should handle these queries, doubts and objections with full confidence, intelligence, enthusiasm and patience. He should not feel irritated by the queries and should never argue with the customer white handling doubts even though the customer disagrees violently and persistently. He should write time and again to convince the prospective customer to buy the product. 

9. Closing the Sale: This step is the climax of the selling process. It aims at taking an order for the products from the prospective customer. A sales person has to act with patience and intelligence to close the sale. He can employ a trial close by which he can judge the customer’s willingness to buy the product. 

A sales person must know the right moment at which the sales story can be closed.  When he is convinced that the customer has made up his mind to buy the product, then he should close the sale by asking questions: What design have you decided ? Which colour have you decided ? Do you want this gift wrapped ? What else would you like to buy ?, etc. 

The sales should be closed in such a manner that the customer feels that he has made the right choice. A sales person should reassure the customer that he has made the right choice. The customer should also be reassured of better services in future. 

10. Follow-up: The next step in the process of personal selling is follow up. It removes all the posts-sales problems. It also provides feedback from the customers. Follow up action refers to the activities undertaken to ensure the customers that he has taken the right decision of buying the product. These activities include: execution of order as per the specifications agreed with the customer, installation of product (if required), checking and testing its smooth performance, maintenence service,  etc. After sale services should be quick, punctual and satisfactory. 

Human Resource Planning – Meaning, Objectives, Process and Steps

Q. Discuss the steps involved in Human Resource Planning in a business organisation.

OR

What are the objectives of manpower planning? Explain its process. 

OR

What is human resource planning? Explain the steps involved in human resource planning process. 

Ans. Meaning of Human Resource Planning: Human Resource Planning is also known as Manpower planning. It is a forward looking function. It may be defined as a procedure by which the management ensures the right number of people and right kind of people at the right time, doing the right things for which they are suitable for the achievement of goals of the organisation.

Human Resource Planning is a process which determines how an organisation should move from its current manpower/human resources position to its desired manpower/human resources position. 

Objectives: HRP is required to achieve the following objectives:

1. To recruit and maintain the HR of requisite quantity and quality.

2. To predict the employee turnover and make the arrangements for minimising turnover and filing up of consequent vacancies. 

3. To meet the requirements of the programmes of extension, diversification etc.

4. To anticipate the impact of technology on work, existing employees and future human resources requirements. 

5. To progress the knowledge, skills, standards, ability and discipline etc.

6. To appraise the surplus or shortage of human resources and take actions accordingly. 

7. To maintain pleasant industrial relations by maintaining optimum level and structure of human resource. 

8. To minimise imbalances caused due to non-availability of human resources of right kind, right number in right time and right place.

9. To make the best use of its human resources.

10. To estimate the cost of human resources. 

So, human resource planning is required to achieve the objectives of estimating potential human resources requirements, to cope with changing requirements of the organisation taking into consideration the changing technology, to make full utilization of existing and potential workforce of the organisation; and career planning of employees.

Human Resource Planning  Process: Process of human resource planning involves the following steps: 

(1) Analysing Organisational Objectives, Plans and Policies: The person concerned with human resource planning must be clear about the objectives, plans and policies of the overall organisation. He must also be clear about the objectives of woman resource planning. The objective of human resource plan are derived from organization’s objectives. The objectives of human resource plans must be in consistency with the objectives of overall organisation. The ultimate objective of human resource planning is to relate future human resource requirements to future organisational needs. Human Resource Department should begin the human resource planning process with analysis of objectives, plans and policies of the organisation. He should also analyse various other plans e.g. expansion, diversification, technological, financial, marketing, production etc. Analysis of overall organisational plans and other plans will help in making decisions about potential HR requirements. Further, organisational policies and HR policies regarding personnel should also be analysed. Organisation’s plans relating to production technique and automation will help in forecasting of human resources requirements. Thus, analysis of organisational objectives, plans and policies are the starting points for forecasting human resource requirements.

(2) Forecasting Human Resource Demand: Forecasting human resource demand is the process of estimating the future human resource requirement of right quality and right number. Analysis of employment trends, the replacement needs of employees due to death, resignations, retirement termination, productivity of employees, growth and expansion of organisation, absenteeism and labour turnover are the relevant factors for human resources forecasting. Demand forecasting is affected by a number of external and internal factors. 

There are number of techniques of estimating/ forcasting human resources demand:

(a) Managerial Judgement: Managerial judgment technique is very common technique of demand forecasting. This approach is applied by small as well as large scale organisations. This technique involves two types of approaches i.e., ‘bottom-up approach’ and ‘top-down approach’. Under ‘bottom-up approach’, line managers send their departmental requirement of human resources to top management. Top of manages management ultimately forecasts the human resource requirement for the overall organisation on the basis of proposals of departmental heads. Under the ‘Top-down approach’, top management forecasts the human resource requirement for the entire organisation and various departments. This information is supplied to various departmental heads for their review and approval. However, a combination of both the approaches i.e. ‘Participative Approach’ should be applied for demand forecasting. Under this approach, top managements and departmental heads meet and decide about the future human resource requirement. So, the demand of human resources can be forecasted with unanimity under this approach. 

(b) Work-Study Technique: This technique is also known as ‘work-load analysis’. This technique is suitable where the estimated work-load is easily measurable. Under this method, estimated total production and activities for a specific future period are predicted. This information is translated into number of man-hours required to produce per units taking into consideration the capability of the workforce. Past experience of the management can help in translating the work-loads into number of man-hours required. Thus, demand of human resources is forecasted on the basis of estimated total production and contribution of each employee in producing each unit items. 

(c) Ratio-Trend Analysis: Demands for manpower/human resources is also estimated on the basis of the ratio of production level and number of workers available. This ratio will be used to estimate demand of human resources. 

(d) Econometrics Model: These models are based on mathematical and statistical techniques for estimating future demand. Under these models relationship is established between the dependent variable to be predicted (e.g. manpower/human resources) and the independent variables (e.g. sales, total production, wotk-load, etc.). Using these models, estimated demand of human resources can be predicted.

(e) Delphi Technique: Delphi technique is also very important technique used for estimating demand of human resources.  This is a technique takes into consideration human resources requirements given by a group of experts i.e. managers. The human resource experts collect the manpower needs, summarise the various responses and prepare a report. This process is continued until all experts agree on estimated human resources requirement.

(f) Other Techniques: The other techniques of human resources demand forecasting are:

(a) Following the techniques of demand forecasting of human resources used by other similar organisations.

(ii) Organisation-cum-succession-charts.

(iii) Estimation based on techniques of production.

(iv) Estimates based on historical records

(v) Statistical techniques e.g. co-relation end regression analysis. 

(3) Forecasting Human Resource Supply: The demand forecasting helps in determining the number and type of personnel/human resources required in future. The next step in human resource planning is forecasting supply of human resources. The purpose of supply forecasting is to determine the size and quality of present and potential human resources available from within and outside the organisation to meet the future demand of human resources. Supply forecast is the estimate of the number and kind of potential personnel that could be available to the organisation.

The above figure illustrates that supply for the forecasting can be estimated based on the following:

(a) Present/Existing human resources: The first step in forecasting supply of human resources is to start with the present/existing human resources of the organization. Existing inventory of human resources refers to the present inventory of human resources department-wise, age-wise, sex-wise, marital-status wise, skill wise, experience wise, qualification wise, training wise and potential wise. Internal mobility of the employees as a result of transfer and promotion etc. should also be evaluated. So, present inventory of human resources is availability of talent in terms of skills, performance and potential.

(b) Potential additions of human resources: There may also be potential additions to the force of human resources. These are editions to human resources may be due to fresh retirement, selections, transfers and promotions of human resources in the various departments of the organisation.

(c) Potential losses of Human resources: In a running organisation, there may be potential losses of human resources. These potential doses of human resources may be due to deaths, retirements, resignations, retrenchment, discharge and promotions, transfers etc. There may also be losses of human resources due to absenteeism and labour turnover.

(4) Human Resource Programming or Estimating Net Human Resources Requirement: After estimating the future demand and supply of human resources, the next step is to ascertain the human resource gap between demand and supply. This gap has to be measured both in quantitative and qualitative terms. Human resource programming is also called estimating net human resources requirement. The net human resources requirement can be obtained by subtracting estimated supply of human resources from demand of human resources. It will help in determining number and kind of employees required in various departments and the entire organisation. On the basis of human resources programming surplus or shortage of human resources requirement can be determined.

(5) Implementation of HR Plan: The next step after determining net human resources requirement is implementation of human resources plans. Human resources programming indicates the shortage or surplus of availability of human resources. If HR programming indicates that there will be shortage of human resources, then the decision to adjust separate the surplus human resources will have to be implemented. The excess human resources in one department can be adjusted in other department or given some other job after training or retrenched. However, if there will be shortage of human resources, then plan for recruitment, selection and placement has to implemented. 

(6) Control and Appraisal of Human Resource Plan: The final step of human resource planning is the control and review mechanism. Finally, the organisation should assess their human resource planning efforts. It should be assessed to determine how far it has helped in achieving organisational objectives. If human resource planning has not worked effectively there is need for either reviewing the human resource plan or modifying the organisational plan. 

Cost of Living Index Number – Meaning, Uses and Formulas

 Q. What is the cost of Living Index Number? Discuss its uses. Give formulas you will use in the construction of cost of living index number.

Ans. Meaning of Cost of Living Index Number: Cost of living index numbers show the direction and magnitude of change taking place in the cost of living of specific group of persons at given time and place. Its purpose is to know how much increase or decrease has taken place in the expenditure made by a consumer on his living, therefore these are also known as consumer price index. Effect of changes in the prices is not uniform on all the classes of a society because different classes of people consume different commodities and changes in the prices of the commodities are different. Therefore, separate cost of living indices are constructed for different classes of people and for different places. Consumer Price Index Numbers are those index numbers which measure the effects on living conditions of different classes of consumers for any change in the level of prices over a period of time. Such types of indices are constructed in order to find out how the economic progress of a country has affected the standard of living of a particular class of people. 

Uses of Consumer Price Index: The different uses of consumer price index are given below.

(i) To Examine the Effects of Changes in Retail Prices: It is used to examine the effect of change in the retail prices on the cost of living of a particular class of people. 

(ii) Helpful in Policy Formulation: The government may decide its price control, minimum wages, rationing policies in the light of the changes in the cost of living index.

(iii) Fixation of Dearness Allowance: The amount of dearness allowance and revision of wages of different categories of employees are decided on the basis of consumer price index. 

Construction of Consumer Price Index: The procedure of constructing a consumer price index is as follows:

(1) Decision about the Class of People: First of all, it should be ascertained that for which class consumer price index will be constructed, i.e., whether the index is related to industrial workers, teachers, office employees, etc. At the same time, the scope of the index should also be well defined. 

(2) Conducting Family Budget Enquiry: After deciding about the specific class, some families from that class should be selected by random sampling and their budgets should be studied to make findings about their items of income-expenditure, quantities of commodities and size of families etc. According to convenience, the items of consumption are divided into five main categories: (i) Food, (ii) Clothing, (iii) Fuel and Lighting, (iv) House Rent, (v) Miscellaneous. 

(3) Obtaining Price Quotations: After selecting the commodities, their retail prices are obtained. Retail prices of the selected comodities are collected from the reliable sources and from those places from where the people of that class buy goods.

(4) To Decide Weight: To express the relative importance of the items of consumption, selective weights are assigned to them. Weights can be given into two ways: (i) In the proportion of consumption quantity in the base year (q₀) (ii) In the proportion of expenditure made on each commodity in the base year (p₀q₀)

(5) Methods of Constructing Consumer Price Index: After this, consumer price indices are constructed by the following methods:

▶ (i) Aggregate Expenditure Method: In this method, wages are assigned to items on the base of base year quantities.

Consumer Price Index (P₀₁) =

∑ p₁q₀∑ p₀q₀

× 100

Aggregative expenditure method is equal to Laspeyre’s Method.

Steps for Calculation

• (i) Quantity in base year (q₀) and prices in current year (p₁) are multiplied and their sum (∑ p₁q₀) is taken. This is the aggregate expenditure in current year.

• (ii) Quantity in base year (q₀) and price in base year (p₀) are multiplied and their sum (∑ p₀q₀) is taken. This is the aggregate expenditure in base year.

• (iii) ∑ p₁q₀ is divided by ∑ p₀q₀ and the quotient is multiplied by 100.

▶ (2) Family Budget Method: Under this method, the weights are assigned to items on the basis of percentage expenditure on the items.

Consumer Price Index (P₀₁) = 

∑ PW∑ W

Where, P = Price Relatives = 

p₁p₀

× 100,

W = Total Expenses = p₀ q₀.

If the geometric mean is used, then,

 P₀₁ = AL[

∑ W log P∑ W

]

Family budget method is equal to Weighted Average of Price Relative Method.

Steps for Calculation

• (i) Price relative of current year for each commodity is computed by the following formula:

• P = 

  p₁p₀

  × 100
• (ii) Price relative of each commodity is multiplied by the expenditure on it or (Value Weight or W) to find out weighted price relatives.
• (iii) Weighted price relatives are summed up (∑PW)
• (iv) ∑W, i.e., summation of weights which is ∑ p₀q₀ is determined.
• (v) ∑PW is divided by ∑W and the quotient is multiplied by 100.

Note I. It should be noted that prices and quantities must be same in units while multiplying. If the units of price and quantity are different, then the unit of quantity must be changed into the unit of price before carrying out multiplication. For example, if the price is per quantal and the quantity purchase is kg, then kg must be to be converted into quindals before carrying out multiplication.

Note 2. The consumer price index numbers (or cost of living index) obtained by both the methods are the same.

Note 3. Aggreate expenditure method should always be preferred to in as much as it proves to be easier than the family budget method so far as calculations are concerned.