INDEX NUMBERS

•SPECIAL AVERAGE DESIGNED TO MEASURE THE

CHANGE IN A GROUP OF RELATED VARIABLE OVER A
PERIOD OF TIME.
FEATURES:-
1] Special type of averages.
2] Measured in percentages
3] Change may be single variable or a group of variables.
4] Used for comparison.
5] Capable of measuring special changes;-cost of living and
prices.

1
IMPORTANCE OF INDEX NUMBER :-
1] IN FRAMING ECO POLICIES-In
Industries,its directors would wish to
know about supply and wage distribution.
Govt has to study price n cost of living
index for future planning of country.
2] MEASURING PRICE LEVEL OVER A
PERIOD OF TIME.
Value of money is inversely proportional
to price level.
Purchasing power is value of money.
2
3]USEFUL IN DEFLATING:-they r used
to adjust the original data for price
changes or to adjust the original data
for cost of living changes n thus
transform nominal wages to real wages.

3
CLASSIFICATION OF INDEX
NUMBERS:-
In eco n business the classifications are:
3. Price.
4. Quantity.
5. Value.
6. Special purpose.

4
PROBLEMS IN CONSTRUCTION OF
INDEX NUMBERS
• PURPOSE OF INDEX NUMBER-Must
be clear. What the index is to measure
n why?
• SELECTION OF BASE PERIOD-
BASE
PERIOD-Period with which other
periods r to be compared. Thus, prices
in BP r to be compared. Thus, prices in
BP r taken as standard prices and are
taken as 100.
5
Following two points must be taken into care:-
2. Should not be too far from the current
period.-thus we can calculate number with
base for a period of about 10 years, after
which it may not serve the purpose we
desire due to difference in taste, change in
price, growth of population.
3. Should not be an abnormal period:-BP should
be free from any type of turmoil or
abnormality etc. period, containing wars,
famines, booms,
depressions,strikes,earthquake should not
be taken as base.
6
Two methods of selecting base period :-
2. Fixed base method:-Here, one period is
taken as base with its index as 100.other
values are compared with it only to get
other indices.
Price Relative For Current Year:-Current
Year’s Price*100/Base Year’s Price.
2.Chain Base Method:-By taking preceding
period as base, we prepare the link relatives.
This method removes the shortcomings of
1st method i.e far from the current period
ad normal periods.
Price Relative For Current Year;-Current
Year' Price*100/PrecedingYear’sPrice.
7
3.SELECTION OF ITEMS AND THEIR
NUMBERS-Which terms are to be included to
compare in order to get Index number is
extremely important. The items to be
included must have following properties:-
• Should be stable in quality, should be graded
or standardized .
• Should not be variable in character so that it
is ensured that we are comparing the same
items over a period of time.
• Item should be true representatives of habits
,tastes,customs,traditions and needs of
people. 8
• Number of items should neither be too
large nor too small.
• Non tangible items should not be
included.
4. CHOICE OF PRICE QUOTATION:-
Price differ from place to place,from
wholesale to retail sale.So great care
has to be taken while taking quotations.
• Price can be quoted in 2 ways.Eg:-
Sugar=14/- per Kg or
Potatoes=50 gms a Rupee.
9
14/- per Kg IS MONEY PRICE.
1/2 Kg a Rupee IS QUANTITY OR INVERSE
PRICE.
• All the commodities are sold at differet
places at different prices.So we should select
a place where price is most stable and hence
will be representative.
• Whether wholesale or retail sale price:- Retail
sale price often differ at different places but
wholesale price are not much variable,hence
we should include wholesale price.

10
• Should not be affected by the personal
biases.So persons must be fully
qualified to perform this duty.
• How many quotations to be considered:-
Number of quotations must be fairly large
and moreover average of these
quotations should be taken.

11
5. CHOICE OF AVERAGES:-
Which average is to be used for price relatives
as we have too many averages such as:-
A.M=Affected by extreme values,so not
suitable.
MEDIAN AND MODE=Are positional measures
and don’t include all the items for
calculations,hence not suitable.
GEOMETRIC MEAN=Such average removes all
the shortcomings mentioned above and hence
considered good for this purpose.

12
6.WEIGHTING SYSTEM:-There are two
types of index numbers:-
2. Weighted Indices.
3. Unweighted Indices.

7.SELECTION OF APPROPIATE
FORMULA:-
The choice of formula would depend not
only on the purpose of the indices but
also on the data available.
13
Two types of formula:-
2. Unweighted Indices Formula
a. Simple aggregative method.
b. Simple Average of relatives
method
2. Weighted average of relatives method
.
a. Weighted average of relatives.
b.Weighted aggregative.

14
 INDEX NUMBER

UNWEIGHTED
OR WEIGHTED
SIMPLE

SIMPLE AVERAGE
WEIGHTED
SIMPLE AGGREGATE OF WEIGHTED
AVERAGE OF
METHOD RELATIVES AGGREGATIVE
RELATIVES
METHOD

15
 UNWEIGHTED
AGGREGATES INDEX
SIMPLE AGGREGATIVE METHOD:-
-SIMPLEST.
STEPS:-
4. ADD THE CURRENT YEAR PRICES FOR
VARIOUS COMMODITIES i.e OBTAIN
∑P1.
5. ADD BASE YEAR PRICES FOR SAME
COMMODITIES i.e OBTAIN ∑Po.
6. DIVIDE ∑P1 BY ∑Po AND MULTIPLY BY
100. 16
Po1=∑P1*100/∑Po.
PROBLEM:-FROM THE FOLLOWING
DATA CALCULATE AN INDEX FOR
2007 TAKING 2006 AS BASE:-
COMMODIT PRICE 06(/- PRICE 07(/-
Y PER Kg) PER Kg)
A 36 39
B 40 40
C 40 46
D 46 50
17
SOLN:-
∑Po=162, ∑P1=175

175*100/162=108.02.
IF 2007 IS TAKEN AS BASE YEAR
162*100/175=92.57.
INDEX NUMBERS ARE NOT MEANT
FOR PRICES ONLY,IT CAN ALSO BE
APPLIED TO QUATITIES OR
VOLUMES ALSO.
18
MERITS:-
2. SIMPLEST METHOD TO FOLLOW.

DEMERITS:-
5. ALL COMMODITIES ARE GIVEN
EQUAL IMPORTANCE,WHICH IS
NOT POSSIBLE.
6. UNITS USED IN PRICE OR
QUANTITY CAN EXERT A BIG
INFLUENCE ON THE VALUE OF
INDEX 19
 SIMPLE AVERAGE OF
RELATIVE METHOD
• USING A.M:- P01=∑P*100/N
P=P1/P0.
P1=PRICE OF INDIVIDUAL
COMMODITY IN CURRENT YEAR.
Po=PRICE OF INDIVIDUAL
COMMODITY IN BASE YEAR.

20
USING G.M:-
P01=ANTILOG{∑ LOG(P1*100/P0)/N}.

USING MEDIAN:-P01 CAN ALSO BE

CALCULATED.
PROBLEM:-USING SIMPLE AVERAGE OF
RELATIVES METHOD,COMPUTE
INDEX NUMBER FOR THE YEAR 1997
USING 1990 PRICES AS BASE.

21
COMMODIT PRICES IN PRICES IN
Y 1990(Po) 1997(P1)
I 15 30
II 18 24
III 16 20
IV 14 21
V 25 35
VI 40 30

22
COMMODIT PRICES IN PRICES P=(P1/P0)
Y 1990(Po) IN *100
1997(P1)
I 15 30 200

II 18 24 133.33

III 16 20 125

IV 14 21 150

V 25 35 140

VI 40 30 75
23
N ∑=823.33
P01=823.33/6=137.32.
USING MEDIAN:-
ARRANGE THE PRICE RELATIVE IN
ASCENDING ORDER.
P01(MEDIAN)=133.33.

24
COMPUTE QUANTITY INDEX FOR THE
FOLLOWING BYSIMPLE
AGGREGATIVE METHOD AND
AVERAGE OF QUANTITY RELATIVES
METHOD BY USING BOTH
ARITHMETIC AND GEOMETRIC
MEAN.

25
COMMODITY A B C D E F

PROD
IN1971(Rs) 20 30 10 25 40 50

PROD
IN1981(Rs) 25 30 15 35 45 55

26
COMMODIT Q0 Q1 Q1/Q0*10
Y 1971(Rs) 1981(Rs) 0=Q LOG Q

A 20 25 125 2.0969

B 30 30 100 2

C 10 15 150 2.1761

D 25 35 140 2.1461

E 40 45 112.5 2.0511

F 50 55 110 2.0414

TOTAL 175 205 737.5 12.5116

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SIMPLE AGGREGATIVE METHOD:-
Q01 =205*100/175=117.143

ARITHMETIC METHOD:-
=737.5/6=122.92

G.M=ANTILOG(12.5116/6)=121.7

28
MERITS:-
• SIMPLE TO CALCULATE.
• EXTREME VALUES DON’T INFLUENCE
AS MUCH IN 1ST METHOD.

DEMERITS:-
• NO PARTICULAR RULE IS
APPLIED,WHEN MEASURE OF
CENTRAL TENDENCY IS APPLIED.
• NO CONSIDERATION IS GIVEN TO
IMPORTANCE OF COMMODITIES.
29
 WEIGHTED
INDEX
NUMBER

WEIGHTED WEIGHTED
AVERAGE OF AGGREGATIVE
RELATIVES METHOD
30
• WEIGHTED AVERAGE OF
RELATIVES METHOD:-HERE WE
FIND THE PRICE RELATIVES FOR
THECURRENT PERIOD TAKING THE
GIVEN YEAR AS BASE YEAR.LET IT
BE DENOTED BY ‘P’.WEIGHT(W) IS
OBTAINED BY MULTIPLYING THE
BASE YEAR QUANTITY WITH BASE
YEAR PRICES.

31
A.M=P01=∑P01=∑PW/∑W.

G.M=P01=A.L{∑W*LOGP)/∑W}.

COMPUTE PRICE INDEX USING

WEIGHTED AVERAGE OF RELATIVE
METHOD USING
6. ARITHMETIC MEAN.
7. GEOMETRIC MEAN.

32
BASE YEAR BASE YEAR CURRENT
QUANTITY PRICE YEAR PRICE
10 20 32
20 12 18
30 8 10
40 4 8

33
 W=P0* P=P1*100
Q0 P0 P1 Q0 /P0 PW LOGP W LOGP

10 20 32 200 160 32000 2.2041 440.823

20 12 18 240 150 36000 2.1760 522.261

30 8 10 240 125 30000 2.0969 503.258

32000
40 4 8 160 200 0 2.3010 368.164

TOTA 13000
L 840 0 1834.5

34
USING A.M:-130000/840=154.76.

USING G.M:-A.L(1834.5/840)=152.7.

35
WEIGHTED AGGREGATIVE
METHOD:-HERE WE HAVE NOT
ONLY TO FIND PRICE INDEX
NUMBER BUT ALSO QUANTITY
INDEX NUMBER.
P0,Q0=PRICE AND QUANTITY FOR
BASE YEAR.
P1,Q1=PRICE AND QUANTITY FOR
CURRENT YEAR.

36
 KELLY
FORMULA

MARSHALL
LASPEYRE’S
EDGE WORTH
FORMULA
FORMULA

IMPORTANT
FORMULAES

FISHER’S PAASCHE’S
FORMULA FORMULA

BOWLEY’S
FORMULA

37
O METHOD PRICE INDEX NUMBER:P01 QUANTITY INDEX NUMBER:Q01

1 LASPEYRE'S FORMULA ∑(p1*q0/∑p0*q0)*100 ∑(p0*q1/∑p0*q0)*100

2 PAASCHE FORMULA ∑(p1*q1/∑p0*q1)*100 ∑(p1*q1/∑p1*q0)*100

3 BOWLEY FORMULA [{∑(p1*q0/∑p0*q0)}+{∑(p1*q1/∑(p0*q1)}]*100 [{∑(p0*q1/∑p0*q0)}+{∑(p1*q1/∑(p1*q0)}]*100

4 FISHER FORMULA √[{∑(p1*q0/∑p0*q0)}*{∑(p1*q1/∑(p0*q1)}]*100 √[{∑(p0*q1/∑p0*q0)}*{∑(p1*q1/∑(p1*q0)}]*100

5 M-E FORMULA {∑(p1*(q0+q1/2)/∑p0*(q0+q1/2)}*100 {∑(q1*(p0+p1/2)/∑q0*(p0+p1/2)}*100

6 KELLY'S FORMULA {∑p1*q/∑p0*q}*100 {∑p*q1/∑p*q0}*100

38
PRICE INDEX NUMBERS ARE
CALCULATED ONLY IF NOTHING
SPECIAL IS MENTIONED.WE
CALCULATE QUANTITY INDEX
NUMBERS ONLY IF MENTIONED.

PROBLEM:-USING ALL THE ABOVE

FORMULA,CALCULATE INDICES FOR
1995 TAKING 1994 AS BASE.

39
 1995, 1
COMMODIT 1994, PRIC 995,
Y PRICE 1994,QTY E QTY
A 8 10 10 9
B 10 12 15 12
C 12 8 18 7
D 15 6 16 8

40
SOLUTION:-

COMMO p0*q p0*q p1*q p1*q

DITY p0 q0 p1 q1 0 1 0 1

A 8 10 10 9 80 72 100 90

B 10 12 15 12 120 120 180 180

C 12 8 18 7 96 84 144 126

D 15 6 16 8 90 120 96 128
∑ ∑ ∑ ∑
=38 =39 =52 =52
6 6 0 4

41
LASPEYRE'S
FORMULA ∑(p1*q0/∑p0*q0)*100=520/386*100=134.7

PAASCHE ∑(p1*q1/∑p0*q1)*100=524/396*100=132.3
FORMULA
[{∑(p1*q0/∑p0*q0)}+{∑(p1*q1/∑(p0*q1)}]
*100=
BOWLEY FORMULA (134.7+132.3)/2=133.52

42
 √[{∑(p1*q0/∑p0*q0)}*{∑(p1*q1
FISHER /∑(p0*q1)}]*100=√134.7*133.3
FORMULA =133.5

{∑(p1*(q0+q1/2)/∑p0*(q0+q1/2
M-E FORMULA )}*100=133.50

43
KELLY’S FORMULA IS USED WHERE
WEIGHT OF ONLY BASE PERIOD ARE
GIVEN.

44
45