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Index numbers are used to measure and compare changes over time in variables that cannot be directly observed, such as business activity or price levels. They provide a composite measure by combining variations in related variables. There are different types of index numbers classified by the variables measured, including price, quantity, value, and business activity. Weighted index numbers assign weights to variables based on their importance, while unweighted index numbers give equal weight. Common weighted index numbers are Laspeyres and Paasche, and common unweighted methods are simple aggregative and simple average of relatives.

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69 views

Stat Assignment

Index numbers are used to measure and compare changes over time in variables that cannot be directly observed, such as business activity or price levels. They provide a composite measure by combining variations in related variables. There are different types of index numbers classified by the variables measured, including price, quantity, value, and business activity. Weighted index numbers assign weights to variables based on their importance, while unweighted index numbers give equal weight. Common weighted index numbers are Laspeyres and Paasche, and common unweighted methods are simple aggregative and simple average of relatives.

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Syedamudassara
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Introduction to Index

Number
Index numbers are meant to study the change in the effects of such factors, which cannot
be measured directly. According to Bowley, “Index numbers are used to measure the
changes in some quantity which we cannot observe directly”. For example, changes in
business activity in a country are not capable of direct measurement but it is possible to
study relative changes in business activity by studying the variations in the values of
some such factors which affect business activity, and which are capable of direct
measurement.

            Index numbers are commonly used statistical device for measuring the combined
fluctuations in a group related variables. If we wish to compare the price level of
consumer items today with that prevalent ten years ago, we are not interested in
comparing the prices of only one item, but in comparing some sort of average price
levels. We may wish to compare the present agricultural production or industrial
production with that at the time of independence. Here again, we have to consider all
items of production and each item may have undergone a different fractional increase (or
even a decrease). How do we obtain a composite measure? This composite measure is
provided by index numbers which may be defined as a device for combining the
variations that have come in group of related variables over a period of time, with a view
to obtain a figure that represents the ‘net’ result of the change in the constitute variables.

Index numbers may be classified in terms of the variables that they are intended to
measure. In business, different groups of variables in the measurement of which index
number techniques are commonly used are (i) price, (ii) quantity, (iii) value and (iv)
business activity. Thus, we have index of wholesale prices, index of consumer prices,
index of industrial output, index of value of exports and index of business activity, etc.
Here we shall be mainly interested in index numbers of prices showing changes with
respect to time, although methods described can be applied to other cases. In general, the
present level of prices is compared with the level of prices in the past. The present period
is called the current period and some period in the past is called the base period.

Simple Index Number


   A simple index number is a number that measures a relative change in a single variable
with respect to a base.

Weighted Index Number


When all commodities are not of equal importance. We assign weight to each commodity
relative to its importance and index number computed from these weights is called
weighted index numbers.

Two methods to find out the weighted index Number that are follows:-

Laspeyre’s Index Number:


            In this index number the base year quantities are used as weights, so it also called
base year weighted index.

                       
Paasche’s Index Number:
            In this index number, the current (given) year quantities are used as weights, so it
is also called current year weighted index.

                       

Unweighted Index Numbers


There are two methods of constructing unweighted index numbers. (1) Simple
Aggregative Method (2) Simple Average of Relative Method

Simple Aggregative Method:


            In this method, the total of the prices of commodities in a given (current) years is
divided by the total of the prices of commodities in a base year and expressed as
percentage.

                       

Simple Average of Relatives Method:


            In this method, we compute price relative or link relatives of the given
commodities and then use one of the averages such as arithmetic mean, geometric mean,
median etc. If we use arithmetic mean as average, then

                         
            The simple average of relative method is very simple and easy to apply is superior
to simple aggregative method. This method has only disadvantage that it gives equal
weight to all items.

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