J.K.

SHAH CLASSES Index Numbers

6. Index Numbers
Basic Concepts
• Index Numbers are special kind of averages, expressed in ratio, calculated as
percentage and used as numbers.
• Index number is a number which is used as a tool for comparing prices and
quantities of a particular commodity or a group of commodities in a particular time
period with respect to other time period or periods.
• Index numbers indicate relative change in price or quantity or value expressed in
percentage.
• Index numbers are always unit free.
• The year in which the comparison is made is called the “Current Year” and the year
with respect to which the comparison is made is the “Base Year”.

• Suppose Price Index in 2011 is 800 based on 1980 prices, then

o 1980 means base year with help of which comparison is done.
o If nothing is mentioned, base prices are always taken as 100.
o 2011 is the current year or present year.
o 800 is the index number or price index number.

• Index numbers are of three types:

o Price Index – When the comparison is made in respect of prices it is called
price index numbers.
o Quantity Index – When the comparison is made in respect of quantities it is
called Quantity of Volume Index Numbers.
o Value Index – When comparison is made in respect of values (Value = Price x
Quantity), it is called Value Index Number.

• Terminology (Unless otherwise mentioned we shall be using the following notations)

o I01 means Index Number for year “1” based on year “0”(Current with respect
to base)
o I10 means Index Number for year “0” based on year “1”(base with respect to
current)
o P1 = Prices prevailing in current year (year 1)
o P0 = Prices prevailing in base year (year 0)
o Q1 = Quantity in current year
o Q0 = Quantity in base year
o P0Q0 = Price x Quantity of Base Year (Value of the base year)
o P1Q1 = Price x Quantity of Current Year (Value of Current Year)
o V01 = Value Index of current year with respect to base year
o V10 = Value Index of base year with respect to current year

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• Concept of price Relative (PR) :

Price relative is defined as the ratio of Current Year’s price to the Base Year’s price
P
expressed as percentage Symbolically, PR= 1 × 100
P0
Construction of Price Index Numbers

Method of Aggregates

Case: 1 Case: 2
Simple Aggregate of prices Weighted Aggregate of prices

P01 =
∑P 1
x100 P01 =
∑ P w x100
1

∑P 0 ∑Pw 0

CALCULATION OF WEIGHTED AGGREGATE OF PRICES UNDER DIFFERENT

TYPE OF WEIGHTS

If w = Q0 If w = Q1
Laspeyre’s Index Paasche’s Index

L01 =
∑PQ1 0
x100 P01 =
∑PQ 1 1
x100
∑PQ0 0 ∑PQ 0 1

Fisher’s Index Bowley’s Index

GM of L and P AM of L and P

F01 = LxP L+P

B01 =
2
If w = Q0 + Q1
Marshall-Edgeworth Index

P01 =
∑ P (Q
1 0 + Q1 )
x100 =
∑PQ + ∑ PQ
1 0 1 1
x100
∑ P (Q
0 0 + Q1 ) ∑PQ + ∑PQ
0 0 0 1

Relative Method
First calculate Price Relative (PR) of each commodity. Price Relative (PR) is defined
as the ratio of the current year’s price to the base year’s price, expressed as
P1
PR = x100
percentage and is given by P0

Case: 1 Case: 2
Simple AM of Price Relative Weighted AM of Price Relative

P01 =
∑ PR P01 =
∑ PR.w
n n=number of Commodities ∑w ∑w= Total Weight

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Note :
• GM is the best average in the construction of index numbers but practically we use
AM, because G.M is difficult to compute.
• Marshall- Edgeworth’s Index number is an approximation to Fisher’s index number.
• Methods of Relatives are also known as Arithmetic Mean Method.
• When a series of Index Numbers for different years are expressed in a tabular form
to compare the changes in different years, then this tabular representation of
numbers is known as “Index Time Series”.

Construction of Quantity Index Numbers

All the formula will remain same as in price index numbers, just interchange p and q, i.e., p
∑PQ 1 0
x100
to q and q to p. For example; if Laspeyer’s Price Index is ∑ P Q , then Laspeyer’s
0 0

Quantity Index we can get by interchanging P to Q and Q to P, and hence it will be

∑Q P1 0
x100
∑Q P0 0 .

Construction of Value Index Number

V01 =
∑PQ1 1
x100
∑P Q
0 0

Cost of Living Index (CLI)

• CLI is also known as Wholesale Price Index, Consumer Price Index or General
Index.
• CLI is defined as the weighted AM of index numbers of few groups of basic
necessities. Generally for calculating CLI; food, clothing, house rent, fuel & lightning
and miscellaneous groups are taken into consideration.
CLI =
∑ Iw
• ∑ w , where I = Individual Group Index and w = Group weight.

• Application of Cost of Living Index

o It helps to calculate the purchasing power of money and real income of the
consumer.
o Increase in CLI implies increase in price index causing thereby an inflation i.e.
reduction in the purchasing power.
100
x1
o Purchasing Power of ` 1 = Cost of Living Index
Money or Nominal Income
x 100
o Real Income = Cost of Living Index

• Concept of Equivalent Salary – Calculation of Dearness Allowances(D.A)

Suppose a person was getting a money income of ` X1 in Year 1 (Y1) when the CLI
was I1 and in Year 2 (Y2) the CLI is I2. If the person wants to maintain his former
standard of living as in Y1, then Real Income (RI) of Y1 should be equal to RI of Y2.
CLI of Y2
x Salary (Money Income) of Y (Rs. X )
1 1
Thus Money Income required in Y2 = CLI of Y1
Let the money income in Y2 is X2. If X2 is less than or equal to X1, then no
allowances are required to be given. But if X2 is greater than X1, then amount of
Dearness Allowances = ` (X2 – X1)

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Base Shifting in Index Numbers

• Base Shifting is a process whereby a new series of Index Numbers with a new base
year is formed from a given series of Index Numbers with another base year.
• Index Number for any year (with base year shifted) is given by:
Old Index Number for the year
x 100
Old Index Number for the New Base Year

Tests of Adequacy of Index Number

• Unit Test – An Index Number is a good index number if it is unit free. All index
numbers will satisfy this test except Simple Aggregate of Prices.

• Time Reversal Test (TRT) – According to this test I01 x I10 = 1 (ignore 100). This test
is satisfied by:
o Simple Aggregate of Prices
o Simple GM of Price Relative
o Marshall Edgeworth Index
o Fisher’s Ideal Index

• Factor Reversal Test (FRT) – According to this test Price Index x Quantity Index =
Value Index. Only Fisher’s Ideal Index satisfies this test.

• Circular Test – Circular Test is an extension of Time Reversal Test. According to this
test I01 x I12 x I23 x …. x I(n-1),n x In,0 = 1. This test is satisfied by:
o Simple Aggregate of Prices
o Weighted Aggregate of Prices with Fixed Weights
o Simple GM of Price Relatives

Fixed Base Method – Chain Base Method

• Under Fixed Base Method (FBM), all the index numbers are calculated with respect
to a fixed base period.
• Under Chain Base Method (CBM), all the index numbers are calculated with respect
to the price of immediate preceding period.
• Under CBM, the index number for the first year will always be 100.
• For the first year, Chain Base Index = Fixed Base Index.

• Fixed Base Index for any year =

Chain Base Index for the year x Fixed Base Index for the preceding year
100

• Chain Index Numbers

o Chain Index Numbers are calculated from Link Index Numbers or Link
Relatives.
o Chain Index for any year =
Link Index for the year x Chain Index for the preceding year
100
Price Relative of the Current Year
o Link Relative = x 100
Price Relative of the Base Year

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Note: Always start with one year preceding to the given years from which you are to
calculate the chain index numbers. In that year (i.e. the preceding year) take both
the link relative and the chain index to be 100.
Splicing of Index Numbers
• Splicing is a process whereby two or more discontinued series of index numbers
with different base years are merged to form a new continuous series of index
numbers with a new base year.
• The factor which is multiplied for such conversion is called “Conversion Multiplier”.
• Let there are two series Y1 and Y2. When the series Y1 is merged into the series Y2,
it is known as “Forward Splicing” and when series Y2 is merged into series Y1, it is
known as “Backward Splicing”.

Calculation of price relatives and price Index Numbers:

1. The following data relate to the price of rice per kg. in different years :
Year : 1998 1999 2000 2001 2002 2003 2004 2005
Price in Rs. : 6 7 7 8 10 14 12 13
Find out price relatives :
(i) Taking 1998 as base
(ii) Taking 2002 as base
(iii) Taking average of 1998, 1999 and 2000 as the base. Also calculate
the link relatives.
2. The price relative for the year 2000 with base 1995 = 100 is 135. The price relative for
the year 1995 with base 1990 = 100 is 120. Find the price relative for 2000 with base
1990 = 100.

3. Find by the method of Aggregates, Index Numbers from the following data:
Commodity A B C D E

Base Price 30 25 90 15 96

Current Price 36 28 108 21 120

a) 120
b) 121.3
c) 122.3
d) 123.4
4. Construct by the method of weighted aggregate of prices, the Index Number for 1960 on
the basis of 1952 from the following information:
Avg price for Avg price for
Commodity Weights
1952 1960
Rice 30 30 20
Pulse 35.5 32.5 6
Potato 12.5 10 4
Oil 90 100 3.5
Salt 8 10 1.5

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a) 100
b) 98
c) 92
d) 96

5. Find by the Arithmetic mean method, Index Numbers from the following data:
Commodity A B C D E
Base Price 30 25 90 15 96
Current 36 28 108 21 120
Price

a) 120
b) 121.3
c) 122.3
d) 123.4

6. Find the Index number by the method of Relatives (using Arithmetic Mean) from the
following data:
Base Current
Commodity
Price Price
Rice 35 42
Wheat 30 35
Pulse 40 38
Fish 107 120
a) 110
b) 115
c) 120
d) 125
7. Construct an Index Number for the following data using Weighted Average of Price
Relatives Method:
Current Year
Base Year (1990) Weights
Commodity (2000)
Price in ` Price in `
A 5.20 4.25 30
B 3.75 2.95 40
C 1.95 2.15 15
D 8.10 8.85 15
a) 115
b) 120
c) 110
d) 100
8. Compute price index for the following data by applying weighted average of price
relative method (Arithmetic Mean Method).
Item Price in 1996 (`) Price in 1997 (`) Quantity in 1996
Wheat 2.00 2.50 40 kg
Sugar 3.00 3.25 20 kg
Milk 1.50 1.75 10 lit

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Refer to the follow data and answer the questions:

1979 1980
Commodity Price Quantity Price
Quantity(kg)
in ` (kg) in `
A 20 8 40 6
B 50 10 60 5
C 40 15 50 10
D 20 20 20 15

9. Which of the following represents Paasche’s Price Index Number:

a) 125.23
b) 124.70
c) 124.96
d) 125.95
10. Which of the following represents Laspeyer’s Price Index Number:
a) 125.23
b) 124.70
c) 124.96
d) 125.95

11. Which of the following represents Fisher’s Price Index Number:

a) 125.23
b) 124.70
c) 124.96
d) 125.95
12. Which of the following represents Marshall-Edgeworth’s Price Index Number:
a) 125.23
b) 124.70
c) 124.96
d) 125.95
13. Geometric Mean of index number of Laspeyre’s and Paasche’s is 229.5648, while the
sum is 480. Find the value of Laspeyre’s and Paasche’s Indices.
a) 300, 180
b) 310, 170
c) 170, 300
d) 280, 200

14. If IDB & IF are equal show that IL & IP are also equal.
15. In calculating a certain cost of living index number the following weights were used.
Food 15, Clothing 3, Rent 4, Fuel & Light 2, Miscellaneous 1. Calculate the index for the
data when the average percentages rise in prices of items in the various groups over
the base period were 32, 54, 47, 78 & 58 respectively.
a) 139.76
b) 141.99
c) 141.76
d) 139.87
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Quantity or Volume Index numbers

16. For the following Compute laspeyre’s and Paasche’s price and Quantity index number
for 2005 with 1995 as the base year
1995 2005
Commodity
Quantity Value Quantity Value
A 50 350 60 420
B 120 600 140 700
C 30 330 20 200
D 20 360 15 30
E 5 40 5 50

17. Given The following Data:

Current Year Base Year
Items
Price (`) Value(`) Value (`) Quantity (kg)
A 20 200 360 12
B 4 36 64 16
C 14 238 575 23
The quantity index using Bowley’s formula is:
a) 65.95
b) 75.95
c) 85.95
d) 95.95
Cost of Living Index
18. Find Cost of Living Index:
Group A B C D E
Index 320 140 270 160 210
Weight 20 15 18 22 25
19. Construct the cost of living index number for the following group of data:
Group Index Number for a
Group Weights
given year
Food 47 247
Fuel & Light 7 293
Clothing 8 289
House Rent 13 100
Miscellaneous 14 236
a) 200.19
b) 250.50
c) 231.19
d) 225.25
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20. Find Cost of Living Index

Group P0 Q0 P1
Food 23 4 25
Clothing 15 5 20
Fuel & Light 5 9 8
House Rent 12 5 18
Miscellaneous 8 6 13

21. Calculate the Cost of Living Index number from the following data:
Price
Items Base Current Weights
Year Year
Food 30 47 4
Fuel 8 12 1
Clothing 14 18 3
House Rent 22 15 2
Miscellaneous 25 30 1
a) 130
b) 124
c) 129
d) 135

22. Find x if Cost of Living Index is 150.

Group A B C D E
Index 200 150 140 100 120
Weights 6 4 x 3 4

23. During a certain period the cost of living index number goes up from 110 to 200 and the
salary of the worker is also raised from ` 325 to ` 500. The worker _____.
a) Gained
b) Looses
c) Fully Compensated
d) Gained by 10%

24. Net monthly income of an employee was `. 800 in 1980. The consumer price index
number was 160 in 1980. It rises to 200 in 1984. Calculate the additional dearness
allowance to be paid to the employee if he has to be rightly compensated?
a) ` 200
b) ` 250
c) ` 275
d) ` 325
25. A worker earned ` 900 per month in 1990. The cost of living index increased by 70%
between 1990 and 1993. How much extra income should the worker have earned in
1993 so that he could buy the same quantities as in 1990?
a) ` 7460
b) ` 9460
c) ` 7560
d) ` 8464
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26. When the cost of tobacco was increased by 50%, a certain hardened smoker, who
maintained his former scale of consumption, said that the price had increased his cost
of living by 5%. What percentage of his cost of living was due to buying tobacco before
the change in price?
a) 8%
b) 10%
c) 12%
d) 5%

Base Shifting

27. Shift the base period of the following series of index numbers from 1978 to 1985:

Year 1982 1983 1984 1985 1986 1987 1988

Index No. [Base
120 125 132 140 150 158 175
1978 =100]

a) 85.71, 89.29, 100, 94.29, 107.14, 112.86, 125

b) 85.71, 89.29, 94.29, 100, 107.14, 112.86, 125
c) 85.71, 89.29, 101.98, 94.29, 107.14, 112.86, 125
d) 85, 89, 94, 100, 107, 112, 125

Fixed Based – Chain Based – Link Relatives

28. Find the Chain Index of the following:

Year 1991 1992 1993 1994 1995 1996 1997 1998
Price 50 60 62 65 70 78 82 84

29. Convert the following fixed base index numbers into chain base index numbers.
Year 2000 2001 2002 2003 2004 2005
FBI 376 392 408 380 392 400

30. From the chain base index number given below, prepare fixed base index numbers.
Year 2000 2001 2002 2003 2004
CBI 80 110 120 90 140

31. From the following Link Index, calculate the Chain Index: (Base year 2002)
Year 2003 2004 2005 2006 2007
Link Index 103 98 105 112 108

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a) 103, 100, 106, 118, 128

b) 103, 100.94, 106, 118.72, 128.22
c) 103.33, 101.11, 106.66, 118.88, 128.88
d) 105, 100, 110, 120, 130
32. From the following Link Relatives, calculate the Chain Index Numbers: (Base year
1999)
Year 2000 2001 2002
Link Relatives 110 95.5 109.5
a) 105, 110, 115
b) 110, 105.1, 120
c) 110, 105.1, 115
d) 115, 110, 105.1
Splicing of Index Numbers

Read the following data and answer the questions that follow:

Year Price Index A Price Index B

[Base Year: [Base Year:
2000] 2003]
2000 100
2001 110
2002 115
2003 120 100
2004 125
2005 135

33. When PI A is spliced with PI B, the spliced index for the year 2000 is:
a) 83.33
b) 93.33
c) 103.33
d) 113.33
34. When PI A is spliced with PI B, the spliced index for the year 2002 is:
a) 83.33
b) 93.33
c) 103.33
d) 95.83

35. When PI B is spliced with PI A, the spliced index for the year 2002 is:
a) 100
b) 110
c) 115
d) 120

36. When PI B is spliced with PI A, the spliced index for the year 2004 is:
a) 100
b) 125
c) 135
d) 150

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37. Spliced the following indices:

Splicing Two Index Numbers Series
Year Old Price Index Revised Price Index
[1990=100] [1995=100]
1990 100.0
1991 102.3
1992 105.3
1993 107.6
1994 111.9
1995 114.2 100.0
1996 102.5
1997 106.4
1998 108.3
1999 117.7
2000 117.8

Theoretical Aspects

38. A series of numerical figures which show the relative position is called
a) Index Numbers
b) Relative Numbers
c) Absolute Numbers
d) None of the above

39. A ratio or an average of ratios expressed as a percentage is called

a) A relative Number
b) An Absolute Number
c) An Index Number
d) None of the above

40. Index Numbers show ___________ changes, rather than absolute amounts of change.
a) Relative
b) Percentage
c) Both a) and b) above
d) Neither a) nor b) above

41. ___________ is a point of reference in comparing various data describing individual

behaviour.
a) Sample
b) Base period
c) Estimation
d) None of the above

42. An index time series is a list of ____________ nos. for two or more periods of time
a) Index
b) Absolute
c) Relative
d) None of the above

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43. The index no. is a special type of average

a) False
b) True
c) Both a) and b) above
d) Nothing can be said

44. We use price index numbers

a) To measure and compare prices
b) To measure prices
c) To compare prices
d) None of the above

45. Theoretically, G.M. is the best average in the construction of index nos. but in practice,
mostly the A.M. is used.
a) False
b) True
c) If b) then a) also
d) None of the above

46. Index Number for the base period is always taken as

a) 200
b) 1
c) 50
d) 100

47. P01 is the index for time

a) 1 on 0
b) 0 on 1
c) 1 on 1
d) 0 on 0

48. P10 is the index for time

a) 1 on 0
b) 0 on 1
c) 1 on 1
d) 0 on 0

49. The purpose determines the type of index no. to use

a) Yes
b) No
c) May be
d) May not be

50. Price relative is equal to

Price in the given year × 100
a)
Price in the base year
Price in the year base year × 100
b)
Price in the given year
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c) Price in the given year x 100

d) Price in the base year x 100

51. Sum of all commodity prices in the current year x 100 =

Sum of all commodity prices in the base year is
a) Relative Price Index
b) Simple Aggregative Price Index
c) Both a0 and b0 above
d) Neither a) nor b) above

52. The ____________ of group indices given the General Index

a) Geometric Mean
b) Harmonic Mean
c) Arithmetic Mean
d) None of the above
53. The number of test of Adequacy is
a) 2
b) 5
c) 3
d) 4

54. _____________ is an extension of time reversal test

a) Factor Reversal Test
b) Circular Test
c) Both a) and b) above
d) None of the above

55. Laspeyer’s method and Paasche’s method do not satisfy

a) Unit Test
b) Time Reversal Test
c) Factor Reversal Test
d) Both b) & c) above

56. Fisher’s Ideal Formula for calculating index nos. satisfies the _________ tests
a) Unit Test
b) Factor Reversal Test
c) Both a) and b) above
d) Neither a) nor b) above

57. When the product of price index and the quantity index is equal to the corresponding
value index then
a) Unit Test
b) Time Reversal Test
c) Factor Reversal Test
d) None of the above holds

58. ______________ satisfies circular test

a) G.M. of price relatives or the weighted aggregate with fixed weights
b) A.M. of price relatives or the weighted aggregate with fixed weights
c) H.M. of price relatives or the weighted aggregate with fixed weights
d) None of the above
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59. Laspeyer’s, Paasche’s or the Fisher’s ideal index do not satisfy

a) Time Reversal Test
b) Unit Test
c) Circular Test
d) None of the above

60. The test of shifting the base is called

a) Unit Test
b) Time Reversal Test
c) Circular Test
d) None of the above

Original Price x 100

61. Shifted price Index =
Price Index of the year on which it has to be shifted
a) True
b) False
c) Both a) and b) above
d) Neither a) nor b) above

62. Chain index is equal to

Link relative of current year × Chain Index of the current year
a)
100
Link relative of previous × Chain Index of the current year
b)
100
Link relative of current year × Chain Index of the previous year
c)
100
Link relative of previous year × Chain Index of the previous year
d)
100

THEORY ANSWERS:

38 a 48 b 58 a
39 c 49 a 59 c
40 b 50 a 60 b
41 b 51 b 61 a
42 a 52 c 62 c
43 b 53 d
44 a 54 b
45 b 55 d
46 d 56 c
47 a 57 c

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