THE INSTITUTE OF FINANCE MANAGEMENT (IFM)

Faculty of Computing, Information Technology and Mathematics

Department Of Mathematics
Tutorial solutions
MTU 07203: Business Statistics I
Index Number – 6th July to 17th July, 2020

Question 1
a) Define the following term(s) Refer Notes
i) Index number
ii) Simple index number
iii) Price relative
iv) Quantity relative
v) Simple average relative price index
vi) Simple aggregate price index
vii) Laspeyres index
viii) Paasche index
b) What are the uses of index number Refer Notes
c) What are some consideration in the construction of index number
i) Selection of component commodities. Which commodities to include in composite
index will of course depend on the purpose to which the final index will be put.
ii) Selection of weights. As mentioned earlier, weight are simply a device to reflect the
importance of the component within the overall composite index and normally price
are weighted by quantities, quantities by price and productivity by number of
workers involved.
iii) Collection of data. This involves finding the value for each component, together
with measuring the magnitude of the weights selected.
iv) Selection of base time period. Technically, it makes no difference what base is
chosen for a time series of index number.

Question 2
The average retail prices of 1 kilogram of potatoes, 1 kilogram of rice and 500 grams of
margarine for each of five years in Sydney are shown in Table below

Item Unit Price of one unit (Tsh)

1983 1985 1987 1990 1992
Potatoes 1 kg 0.64 0.49 0.76 0.93 0.70
rice 1 kg 0.88 0.81 0.92 1.05 1.08
margarine 500 gram 1.01 1.28 1.17 1.44 1.52

Find the price index for each item related to the base year of 1983
Solution:
 1.52
The price index of margarine in 1992 is ×100=150.5
1.01
0.76
The price index of potatoes in 1987 is × 100=118.8
0.64
Note that the simple price index for each item in base year 1983 will always be 100. The
complete set of simple index number is shown in Table below
Item Unit Simple index number
1983 1985 1987 1990 1992
Potatoes 1 kg 100 76.6 118.8 145.3 109.4
rice 1 kg 100 92.0 104.5 119.3 122.7
margarine 500 gram 100 126.7 115.8 142.6 150.5

Question 3
The average price in Sydney for five items in 1978, 1987 and 1992 are shown in Table below.
Calculate:
a) The simple aggregate index for 1992 using 1978 as the base year.
∑ p n=1.62+1.72+ 3.15+1.08+1.74=9.34
∑ p o=0.93+0.63+ 1.09+ 0.68+0.82=4.15
9.34
Simple aggregate index = ×1000=225.1
4.15

b) The simple aggregate index for 1992 using 1987 as the base year.

∑ p n=1.62+1.72+ 3.15+1.08+1.74=9.34
∑ p o=1.80+1.58+2.65+ 0.92+1.43=8.38
9.34
Simple aggregate index = ×100=111.5
8.38

c) Interpret the value of the two simple aggregate indices

The simple aggregate index in (a) was 225.1. Since this is larger than 100, we substract 100
to obtain 125.1. This means that the price of this basket of goods increased by 125.1%
between 1978 and 1992.

The simple aggregate index in (b) was 111.5. Since this is larger than 100, we substract 100
to obtain 11.5 This means that the price of this basket of goods increased by 11.5% between
1987 and 1992.

Item Unit Price of one unit (Tsh)

1978 1987 1992
Butter 500 g 0.93 1.80 1.62
Sugar 2 kg 0.63 1.58 1.75
 sausages 1 kg 1.09 2.65 3.15
rice 1 kg 0.68 0.92 1.08
tea 250 g 0.82 1.43 1.74

Question 4
Use 1987 as the base year, use the data in Table below to calculate the simple average of relative
price for 1992
Item Unit Price of one unit (Tsh)
1978 1987 1992
Butter 1 kg 1.86 3.60 13.24
Sugar 6 kg 1.89 4.74 5.25
sausages 5 kg 5.45 13.25 15.75
rice 250 kg 0.17 0.23 0.27
tea 500 g 1.64 2.86 3.48

Solution:
We first calculate the individual simple price indices using the above table. These are
shown in Table below
Item Simple price index
Butter 1.62
×100=90.0
1.80
Sugar 1.75
×100=110.8
1.58
Sausages 3.15
×100=118.9
2.65
Rice 1.08
×100=117.4
0.92
tea 1.74
× 100=121.7
1.43

Simple average of relative price =

90+110.8+118.9 +117.4 +121.7 558.8
= =111.8
5 5

Give an interpretation of the value found for the average of relative price

The average of relative price was 111.8. since this is large than 100, we subtract 100 to
obtain 11.8. This implies that the price of this basket of goods increase by 11.8% between
1987 and 1992. This contradicts both the 11.5 % increase credited to the same items and
the 13.4%

Question 5
The average retail price in Brisbane of one dozen 55 gram eggs, 500 grams of butter and one 680
gram loaf of white, sliced bread are shown in Table below for each of the year 1982, 1986 and
1992. Also shown are the quantities of each item sold in 1982.

Item Unit Quantity sold Price ($)

in 1982 1982 1986 1992
Potatoes 55 g 37 1.54 1.83 1.98
rice 500 g 28.5 1.38 1.62 1.62
margarine 680 g 82.0 0.76 0.95 1.28

a) Use 1982 as the base year, find the Laspeyres index for
i) 1986
Solution:
The relevant calculation are shown in Table below
Item po q o pn qo
Eggs 1.54×37.0=56.98 1.83×37.0=67.71
Butter 1.38×28.5=39.33 1.62×28.5=46.17
Bread 0.76×82.0=62.32 0.95×82.0=77.90
Total 158.63 191.78

191.78
Laspeyres index= × 100=120.9
158.63
According to the Laspeyres index, the weighted average retail price of these items rose by
20.9% between 1982 and 1986.

ii) 1992
Solution:
The relevant calculation are shown in Table below
Item po q o pn qo
Eggs 1.54×37.0=56.98 1.98×37.0=73.26
Butter 1.38×28.5=39.33 1.62×28.5=46.17
Bread 0.76×82.0=62.32 1.28×82.0=104.96
Total 158.63 224.39

224.39
Laspeyres index= ×100=141.5
158.63
According to the Laspeyres index, the weighted average retail price of these items rose by
41.5% between 1982 and 1992.

b) Suppose for the data in Table above that the quantities of eggs, butter and bread sold in
1992 were 31.5 million, 24.0 million and 96.5 million units, respectively. Find the Paache
index for 1992 using 1982 as the base year
 Solution:
The relevant calculation are shown in Table below
Item po q o pn qn
Eggs 1.54×31.5=48.51 1.98×31.5=62.37
Butter 1.38×24.0=31.12 1.62×24.0=38.88
Bread 0.76×96.5=73.34 1.28×96.5=123.52
Total 154.97 224.77
Σ pn qn
Paasche index= × 100
Σ p o qo

224.77
Paasche index= ×100=145.0
154.97
According to the Paasche index, the weighted average retail price of these items rose by
45.0% between 1982 and 1992.

c) Calculate Fisher’s ideal index for 1992 where the base year is 1986, using the above data.

Solution:
Fishe r ' s ideal index=√ ( Laspeyres index ) (Paasche index)

∑ pn qo ∑ pn q n ×100
'
Fishe r sideal index=
√ ∑ p o qo ∑ po q n
¿ √ ( 141.5 )( 145.0 ) =143.2

According to the Fisher’s ideal index, the weighted average retail price of these items rose
by 43.2% between 1986 and 1992.