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Index No

This document discusses methods for calculating index numbers and cost of living indices. It explains that index numbers are used to measure changes in variables over time or location using price and quantity indices. Common price indices include the consumer price index and wholesale price index. Index numbers can be calculated using unweighted or weighted methods such as the simple aggregate, simple average, Laspeyres, and Paasche indices. The cost of living index specifically measures changes in the cost of living commodities and can be calculated using the aggregate expenditure or family budget method. The aggregate expenditure method uses quantities consumed in the base year as weights while the family budget method takes the weighted average of price relatives using base year values.

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145 views2 pages

Index No

This document discusses methods for calculating index numbers and cost of living indices. It explains that index numbers are used to measure changes in variables over time or location using price and quantity indices. Common price indices include the consumer price index and wholesale price index. Index numbers can be calculated using unweighted or weighted methods such as the simple aggregate, simple average, Laspeyres, and Paasche indices. The cost of living index specifically measures changes in the cost of living commodities and can be calculated using the aggregate expenditure or family budget method. The aggregate expenditure method uses quantities consumed in the base year as weights while the family budget method takes the weighted average of price relatives using base year values.

Uploaded by

Madhumitha Reddy
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© © All Rights Reserved
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METHODS USED TO CALCULATE INDEX NUMBERS

INDEX NUMBER DEFINITION


Index numbers are statistical methods that are used to measure the relative change in the levels of a
variable or group of variables with respect to time, geographical location etc. The two most
important types of index numbers are (i) Price index numbers and (ii) Quantity index numbers.
Examples for price index numbers are Consumer price index numbers, Wholesale price index
numbers, and Cost of living price index numbers. Examples of Quantity price index numbers are
school maintenance supplies, inventory maintenance supplies, etc.
METHODS USED FOR CALCULATING INDEX NUMBERS
Index numbers are calculated primarily using un-weighted or weighted methods. The un-weighted
methods are:
Simple Aggregate: In this method, sum of current years prices is divided by sum of base
years prices and the quotient is multiplied by 100.
Simple Average of Price relatives: The current year price is expressed as a price relative of
the base year price. These price relatives are then averaged to get the index number. The
average used could be arithmetic mean, geometric mean or even median
The weighted methods are:
Weighted Aggregative and Weighted average of price relatives method.
Some of the weighted average methods include:
Laspeyres index[1]: A weighted aggregate price index in which the weight for each item is its
base period quantity.
Paasche indes[1]: A weighted aggregate price index in which the weight for each item is its
current-period quantity.
Dorbish & Bowleys Method[2]: This method is the arithmetic mean of both Laspeyres and
Paasche indices.
Fishers ideal Method[2]: This is the geometric mean of both Laspeyres and Paasche indices.
Weighted average of price relatives methods: In weighted Average of Price relative, the price
relatives for the current year are calculated on the basis of the base year price. These price relatives
are multiplied by the respective weight of items. These products are added up and divided by the
sum of weights.
COST OF LIVING PRICE INDEX
The cost of living index is used to represent the changes in the cost of commodities which affects
the living. For example of the cost of living in lay man terms is considered as his total expenditure for
his living at a given time in a particular place. For example, if Rs. 1000 is the total expenditure to live
in city A in the year 2013 and it is Rs. 2000 in the year 2014, then this change is indicated using the
Cost of living index. Since we know the cost of living for various places at a given point in time, we
can compare the cost of living among various places.
METHODS USED FOR CALCULATING COST OF LIVING INDEX
Aggregate expenditure method or weighted aggregative method
Family budget method or the method of weighted relatives

AGGREGATE EXPENDITURE METHOD OR WEIGHTED AGGREGATIVE METHOD
In this method the quantities of commodities consumed by the particular group in the base year are
taken as weights. The formula is given by consumer price index
100
0 0
0 1

q p
q p


FAMILY BUDGET METHOD OR THE METHOD OF WEIGHTED RELATIVES

In this method cost of living index is obtained on taking the weighted average of price relatives, the
weights are the values of quantities consumed in the base year i.e.
0 0
q p v . Thus the consumer
price index number is given by consumer price index

v
pv

Where 100
1

o
p
p
p for each item

0 0
q p v , value on the base year
As Aggregate expenditure method is easier to compute, it is suggested to use the same for easier
computation.

References:

1. Anderson, David R. Sweeny, Dennis J. Williams, Thomas A. 2011. Statistics for Business and
Economics. India, Cengage Learning India Private Limited.
2. Wikipedia.2014. Price Index[online].[Accessed 23 April 2014]. Available from:
http://en.wikipedia.org/wiki/Price_index
3. [Author Unknown].[Year Unknown]. Index_numbers[online][Accessed 23 April 2014].
Available from: https://statsinfoindia.weebly.com

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