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. 

Security Concerns in E-Commerce and Their Solutions

 Q. Explain security concerns in E-Commerce with solutions. 

Ans. Essential security requirement for safe electronic payments are: 

1. Confidentially: Information should be protected from eyes of unauthorized internal users,external hackers and from being intercepted during transmission on communication networks by making it unintelligible to the attacker. 

2. Integrity: Ensuring that information will not be accidentally and maliciously altered or destroyed during transmission. On retrieval or receipt at the other end of a communication network the Information should appear exactly as was stored or sent. It should be possible to generate an alert on any modification, addition or deletion to the original content. 

3. Availability: The Information that is being stored or transmitted across communication networks should be available whenever required and to whatever extend as desired within pre-established time constraints.

4. Authenticity: Authenticity is a method to verify the buyer’s identity before payment is authorized. It should be possible to prevent any person or object from masquerading as some other person or object.  When a message is received it should therefore be possible to verify whether it has indeed been sent by the person or object ciming to be the originator.

5. Non-Repudiability: It is the protection against customer’s denial of orders placed and against merchant’s denial of payment mode. After sending/ authorizing a message, the sender should not be able to, at a later date, deny having done so. Similarly, the recipient of a message should not be able to deny receipt at a later date.

6. Encryption: Encryption is a process of making messages indecipherable except by those who have an authorized decryption key.

7. Auditability: Audit data must be recorded in such a way that all specified confidentiality and integrity requirements are met. 

Security Schemes (or Security Solution): Main security schemes for electronic payment systems are :

1. Encryption 

2. Digital Signature 

3. Security Certificates

1. Encryption: 

Control against Network Threats (Encryption): An effective and practical way to safeguard data transmitted over networks is by encryption. The process required an encryption device (key) for converting the original message into a code, as well as decryption device (key) for translating the code back into recognizable text. In business data processing, this can be accomplished by using specialized computer software. There are two types of encryption:

(i) Symmetric encryption or secret key cryptography: Secret key encryption is beased on a single key. In this scheme, the same key is used by a sender (for encryption) and a receiver (for decryption). The most widely accepted algorithm for secret key encryption is the Data Encryption Standard (DES). Essentially, therefore, for every period of partners engaging in secure communications, a new key has to be generated and securely maintained. 

(ii) Asymmetric encryption or public key cryptography: Public key cryptosystems are built around the possession of a pair of keys - a public key and a private key by each entity washing to engaged in secure communications. While, as the name suggests, the public key is known to everyone, the private private key is known only the owner. The algorithm used to generate these keys is such that if either of these keys is used to encrypt a message, only the corresponding key in the key pair will be able to decrypt it. The most popular algorithm with public key cryptography is the RSA (Rivest, Shamir and Adelman) algorithm. This algorithm has never been broken by hackers so it is seen as the safest encription method known to date. This scheme is used to provide both the services of confidentiality and authentication. RSA algorithm is usually used to transmit the secret key of DES algorith because DES algorithm is more efficient and faster in handling encryption and decryption. 

2. Digital Signatures: The digital signatures are a means of ensuring authentication of electronic information. Digital signature is an electronic signature whose authenticity is guaranteed through encryption and a password.

The digital signature technology involves:

(i) Private Key: A unique combination known only do the signer. It is a used to encrypt the message. 

(ii) Message Digest: The encrypted message that is created with the help of private key. 

(iii) Public Key: A code sent to the receiver separately to enable the decryption of the message digest. It is also available on the website of the certification authority.

In this scheme, a message is encrypted with the sender’s private key to generate the ‘signature’. The message is then sent to the destination along with the signature. The recipient decrypts the signature using the sender’s public key, and if the result matches with the copy of the message received, the recipient can be sure that the message was sent by the claimed originator and that the message has not been modified during transmission, since only the originator is in possession of the corresponding encryption key. 

The RSA algorithm is widely used to implement digital signatures. The other popular algorithm is the Digital Signature Algorithm (DSA) developed by the US National Institute of Standards and Technology. 

3. Security Certificates: Just as a passport is a universal way to establish your identity and gain entry to another country, a digital or security certificate provides identification in the electronic world. Certificate authorities (CAs) are organizations that issue security certificates. Much like the role of the passport office, the role of the CA is to validate ate the certificate holder’s identity and to “sign” the certificate so that it cannot be forged or tampered with. Once a CA has signed a certificate, the holder can present the certificate to people, websites, and network resources. 

A certificate is a unique digital ID that can be used to verify the identity of an individual. The certificate always includes a public key, the name of the entity it identifies, an expiration date, the name of the certificate authority (CA) that issued the certificate.

These certificates use public key cryptography to sign and authenticate signatures and are protect protected by public and private key pairs linked by cryptographic algorithms. These keys have the ability to encrypt and decrypt information. The digital signature component of a security certificate is your electronic identity card. The digital signature tells the recipient that the information actually came from you and hasn not been forged or tampered with.

Business Cycle: Meaning and Phases of a Business Cycle

Q. What is a Business Cycle ? Describe various phases of a Business Cycle. 

Ans. Meaning of Business Cycle: Every country witnesses boom and depression periodically. Depression is characterised by falling production, falling prices, and rise in unemployment. On the other hand, boom is characterised by rising production, rising prices and high employment percentage. These changes of boom and depression are cyclical in form. Hence, these are called Trade or Business Cycles. Rhythmic fluctuations taking place in an economy, at intervals, in the form of boom and depression are called Trade or Business Cycles.

In the words of Lord Keynes, “A business cycle is composed of periods of good trade characterised by rising prices and low unemployment percentage alternating with periods of bad trade characterised by falling prices and high unemployment percentage.”

According to Anatol Murad, “Business Cycles are alternations of prosperity and depression.”

Phases of Business Cycle: According to Prof. Schumpeter a business cycle can have four phases:

(1) Expansion or Boom,

(2) Recession, 

(3) Depression or Trough or Contraction, and

(4) Recovery.

The following figure illustrate all the four phases or stages of business cycles:

● (1) Expansion or Boom: This phase of the business cycle represents the best stage of prosperity. The objective of the national economic policy of each country is to attain this stage. In this phase hectic economic activities go on and factors of production are put to optimum use. The main characteristics of this phase are:

(i) Income or production is maximum. 

(ii) The economy reaches full employment by removing unemployment.

(iii) Prices rise very high.

(iv) Wages, rates of interest, rent and taxes increase. But increase in all these is less than increase in prices. Thus, real wages do not rise much.

(v) Because of relatively more increase in prices than cost of production, profits rise very high.

(vi) Rise in profits and possibility of their remaining high, lead to rise in the prices of shares. As a result, expectations of profits rise further. 

(vii) Under condition of prosperity, today's an entrepreneurs become optimist. All kinds of products and speculative activities grow. As a result, there is more investment.

(viii) Bank banks pursue liberal credit policy leading to more investment in machines, factory buildings, etc. It results in more productivity.

(ix) Under condition of prosperity, producers expand economic activities by stimulating demand for consumption goods and rise in price level. Explain expenditure of the consumers rise and so also demand.

(x) Under condition of prosperity, the process of expansion continues to be cumulative and self-sustained till the economy reaches the highest level of production, called boom. It is the situation of over full employment and inflation.

● (2) Recession: Under the phase of prosperity, the entrepreneurs make investments in certain ventures which do not prove to be profitable. Their optimism gives way to pessimism. Investivment shows signs of decline. Many enterprises are closed down. Unemployment spreads and income of the people falls. As a matter of fact, beyond the stage of full employment, annie increase in investment is followed by increase in interest, wages and other costs. Consequently, prices rise sharply causing fall in demand. Falling demand obliges the firms to sell their stocks at reduced prices. This paves the way for the recession. In this phase there is decline in economic activities. The main to main features of this phase are under.

(i) There is fall in income and output.

(ii) Workers are rendered unemployed.

(iii) Prices begin to fall.

(iv) Wages fall.

(v) Profits fall. There is no new borrowing despite fall in the rate of interest.

(vi) There is contradiction of bank credit.

(vii) Fall in investment sets in motion the reverse action of the multiplier. Consequently, income falls many times more than the decline in investment.

(viii) Demand of the consumers for various goods fall. 

(ix) There is a sharp decline in the stocks of goods. 

(x) There is a feeling of doubt and fear among the people. They turn pessimistic. Share prices fall.

● (3) Depression or Contraction: Once the process of recession starts, it becomes almost difficult to stop the rot. It goes on gathering momentum and ends hopeless depression. Consequently, economic activities are faced with depression or contraction. Level of output and employment is extremely low. There is heavy fall in prices and wages. Prices of goods fall much more than wages and interest, resulting into heavy losses to the entrepreneurs and traders. Workers are the hit adversely because of widespread unemployment. Production and distribution systems of the economy go out of gear. Heavy fall in profits serves as a disincentive to any new investment. Although rate of interest falls, yet no new investment takes place as marginal efficiency of capital falls more than proportionate fall in rate of interest. 

Under depression, prices of raw materials fall more than the prices of finished products. Economic condition of farmers and producers of raw material grows worse than that of the traders and producers of finished goods. Because of the reverse action of the multiplier and the accelerator, there is heavy fall in income. Share prices fall rapidly. Many indian industries are ruined. Eighth every mversously affects the entire economy. Thus, under depression, all economic factors like income, output, employment, prices, profit, interest, wages, demand etc. have a tendency to contract. Salient features of this phase are as follows:

(i) Level of output and income is low.

(ii) Unemployment increases.

(iii) Wages, interest and other costs decline.

(iv) Price level falls.

(v) Volume of the profits falls sharply. Hence, despite fall in the rate of interest, inducement to invest very low.

(vi) Cash reserves with the bank pile up and demand for credit falls. 

(vii) Old and worn-out machines are not replaced. Hence, demand for capital gods falls.

(viii) Demand for consumer goods falls.

(ix) There is an all-round decline in investment , causing reverse action of multipliers and accelerator.

(x) People grow pessimist. It affects economy adversely. 

● (4) Recovery: It is worth noting that depression phase cannot last for ever. During the phase of depression the entrepreneurs do not even replace machines and other capital goods. Production falls considerably. Stocks of goods are at their lowest. Even during the phase of depression a situation does arise wherein shortage of goods is experienced. Need for replacement of machines become so imperative that the entrepreneurs are obliged to buy new machines to replace old and worn out ones. It results into more demand for capital goods. Investment in capital goods industries increased. As a result of it, interaction of multiplier and the accelerator comes into play and there is increase in income. Demand for goods rises. There is increase in output and employment. Thus, the economy gradually moves from depression to recovery. The wave of recovery once initiated begins to feed up itself. The main features of this phase are as follows:

(i) Replacement investment results into increase and income output. 

(ii) Employment increases.

(iii) Demand for consumption and production good rises.

(iv) Prices begin to look up.

(v) There are more profits.

(vi) Costs increase relatively less.

(vii) Investment increases.

(viii) Demand for bank loans and advances increases.

(ix) Pessimism gives place to optimism.

Table. Features of Different Phases of Business Cycles 

 

Feature	Expansion or Boom	Recession	Depression	Recovery
1.  Employment	Increases	Suddenly falls	Very Low	Slowly rises
2. Output	Increases	Falls	Falls very low	Slowly rises
3. Wages	Rise	Fall	Fall very low	Begin to rise
4. Prices	Rise	Fall sharply	Fall very low	Begin to rise
5. Interest	High	Begins to fall	Very low	Begins to rise
6. Bank Credit	Expands	Suddenly falls	Falls low	Begins to expand
7. Cost of Production	Rises	Falls	Falls very low	Begins to rise
8. Stocks	Large	Fall	Fall very low	Begins to rise
9. Feeling	Optimism	Doubt and Fear	Pessimism	Optimism

Phases of Business Cycle 

Meaning and components of group dynamics.

 Q. Explain the meaning and components of group dynamics.

Ans. Meaning of Group Dynamics: Group Dynamics contains two terms – Group and Dynamics. Group is basically collectivity of two or more persons. Dynamics comes from greek word meaning force. Thus, group dynamic is concerned with the interaction of forces among group members in a social situation. Analysis of forces within a group is known as group dynamics.

It refers to the forces operating in groups, which have an impact on the behaviour of group members. Group dynamics refers to those forces operating or present in the group and which influence the behaviour of the members of the group. These forces chiefly are the group composition, group norms, group leadership, group cohesiveness, etc. The study of group dynamics provides information to the managers about the way to control the behaviour of the members of the group. 

The social process by which people interact with each other in small groups is called group dynamics.  Group dynamics refers to the understanding of behavior of people in groups that are trying to solve a problem on making a decision. 

Thus, Group Dynamics refers to - 1. Social process by which people interact in a group environment. 2. The attitudinal and behavioural characteristics of a group.

Components of Group Dynamics: The major components of group dynamics are the following: 

1. Group Composition: Group Composition has an important part to play in influencing the group dynamics. Group composition depends on the extent of commonalty of the members of the group. The members of a group are either homogeneous or a heterogeneous. In the homogenous group the members have similar qualities. This similarity can be (i) Demographic, e.g. caste, sex, education, experience, age, income, culture, etc. (ii) personality (iii) abilities and (iv) opinions. In the heterogeneous group the members differ on these points.

Group Composition is important because it affects the behaviour of the members of the group and the results.  The members of both the types of groups in respect of behaviour and possible results are as follows:

(a) Homogeneous Group: The members of homogenous group have more cohesiveness. Consequently, there are less conflicts among them. Since there is no variety in their qualities, theses members are often unsuccessful in handling adverse situations

(b) Heterogeneous Group: The members of such a group have different qualities. Consequently, there is lack of cohesiveness among them. Because of this there are usually conflicts. The members have different specialities which help them to face adverse situation successfully.

In this way, we can see that the group composition affects the behaviour of the group members.

2. Group Norms: Norms refers to those standards which guide the behaviour of the members of the group. Group norms are the acceptable standards of behaviour within a group that are shared by the members of the group. Norms defines the boundaries of the acceptable and unacceptable behaviour.

Some rules are required for the successful running of the activities of a group. These rules are known as norms in a group. Normames norms are those standards which guide the behaviour of the members of the group. For example, the order of a manager to the effect that nobody will use telephone for personal use during the working hours in the office, gradually becomes a norm. These norms guide the members as to how to conduct themselves in a particular situation – what is to be done and what is not to be done. Group norms are normally unwritten (oral). They are brought to the notice of the members and after that they are bound to comply with them. Those members who ignore these norms have to face boycott from the group for which there is a provision to this effect. 

Features of Group Norms: The chief features of the group norms are as follows:

(i) Group norms guide the behaviour of the members of the group.

(ii) Group norms clearly specify the duties of the members of the group. 

(iii) Group norms can both be written and oral.

(iv) Group norms are laid down for important function.

(v) Those memers members who failed to observe the group norms can be boycotted.

(vi) There is a variety among group norms of different groups.

(vii) Group norms generally take shape gradually but if needed they can be formed quickly.

(viii) Group norms do not apply to all the members in equal measure, e.g., the members occupying high ranks may not always like to follow them as it is not necessary to do so.

They are typically created in order to –

(i) Facilitate group survival.

(ii) Make behaviour more predictable.

(iii) Avoid embarrassing situations.

(iv) express the values of the group.

Why People Conform to Group Norms? 

The members of the group conform to group norms because of the following reasons:

(i) Proper Role Pay: Every member of the group has to perform a special role. Those members who observe group norms can perform their role more effectively. Norms guide them in their action.

(ii) Self Interest: Every member of the group has to keep in mind the interest of the group. By conforming the group norms he can protect his personal interest along with the interests of the group.

(iii) Group Control: The group has a claim on the members of the group. They are afraid lest they should be boycotted by the group. That is  why they observe the group norms.

(iv) Rewards: In some of the groups, it is already known to the members that those who observe the group norms will be rewarded. They observe norms in order to get rewarded.

(v) Goodwill: Some groups enjoy a special goodwill among the people. In order to maintain this goodwill, the members have to observe the norms compulsorily.

3. Group Leadership: Group leadership is another element that influences the behaviour of the members.  Every group has a leader. The style of working of the leader has an effect on the behavior of the members of the group. He/She gives an identity to the group as a functioning unit. Groups can both be formal and informal. 

In the formal group, leaders are appointed. Their ranks, powers and responsibilities are formally laid down (explained). The chief function of these leaders is to order and direct the members in the work of achieving the objectives of the organization. On the contrary, leaders are not appointed in the informal group but are accepted because of their personality or impression. Such leaders help the members of the group in giving expression to their thoughts and helping them in getting their demands highlighted. There can be more than one leader at a time in a group.

4. Group Cohesiveness: Group Cohesiveness refers to the closeness or similarity of attitude, behaviour and performance of the members of the group. Group Cohesiveness is an indicator of the unity of the members of the group. If this cohesiveness is found in ample measure in a group then, (i) the members are cooperative, (ii) unanimity of opinion is immediately established on any point, (iii) mambers like one another, (iv) members observe group norms, (v) members perform effectively. This situation compels the members to stick to the group. On the contrary, if the cohesiveness is little short,  then (i) the members lack the spirit of cooperation, (ii) there are differences of opinion which delays decisions, (iii) members do not like one another, (iv) members ignored group norms and cannot work effectively. This situation compels the members to drift away from the group. 

Features of a Cohesive Group: A cohesive group has the following features:

(i) All the members have positive attitude towards the group objectives and group norms.

(ii) The number of the number of the members of the group is less.

(iii) Members are more loyal to the group.

(iv) Members often meet regularly at short interval.

(v) There is free and effective communication among the members.

(vi) Group of a successful history.

(vii) Members of the group feel secure and satisfied.

(viii) Members are not willing to leave the group under any condition.

(ix) Members take the final decision quickly.

(x) The goodwill of the group is greeter as compared to the goodwill of other groups. 

5. Group Status: Group status refers to the position of rank of a person in a group which he gets because of his personal qualities. A person is recognised by his status and gets motivated by high rank. The behaviour of a motivated person is different to others. In nutshell, we can say that because of the differences in the ranks, people behave differently. In an organisation there are two types of status available:

(a) Formal Status: Various posts are created in every organisation, e.g. General Manager, Functional Manager, Supervisor, etc. People get a particular post in accordance with their education, training and experience. The salary, other benefits, respect, etc. are connected with the position that one holds. One gets encouraged on seeing these things and tries to work better.

(b) Informal Status: In another organization along with the formal status one gets informal status also. Informal status is obtained with the help of experience, personality, age, sex, etc. As accepting somebody as the leader is an example an informal status.

6. Group Roles: The role means the expected behaviour of the holder of a special position in a social unit. Here a social unit can be a family, a club or an educational institution. 

The role of the members of the group is cleared in formal group. Every member remains conscious of his role. Every effort is made so that nobody can raise a finger on their role (i.e., point out any weakness or deficiency in their role). This feeling or thinking is reflected in their behaviour. On the other hand, the role of the members in an informal group is not clear. It is not explicitly laid down as to what member is expected to do in a particular situation. This is not decided at any point of time. This unclear on unspecified nature of the role of the members affect them negatively. It is, therefore, clear that greater clarity about the role of the members would give them great satisfaction and they will work in a better way for the group. 

7. Group Think: In the group, all the members have different types of information. Everything is discussed about various kinds of information. With the help of such discussion, many alternatives emerged as a possible solution to the problem. Then all the alternatives are analysed and some final decision is arrived at.  Since all the members have participated in the process of arriving at the final decision, such a decision is happily implemented. On the contrary, on some occasion, time and resources are visting in arriving at group decisions. Unnecessary controversy takes place. Suggestions includes by politics are advanced. Individual interests outweigh group interests. In the absence of individual responsibility in such decisions risk factor is ignored. In this context, it has been said that responsibility of many means nobody's responsibility. This reduces the effectiveness of the group decisions. Even then if the negative points in the group decisions are controlled a little, they can prove to be better than individual decisions.

Or

Group Think is the psychological phenomenon that occurs within a group of people which desires for a harmony or confirmity in the group results in an irational or dysfunctional decision making outcome. It occurs when members of a group exert pressure on each other to come to consensus in a decision making. It results in –

1. Careless judgements.

2. Unrealistic appraisals of alternative course of actions.

3. A lack of reality testing.