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Index Numbers

An index number is used to measure changes in variables like prices over time. The document defines key terms like base year, current year, price relative, and discusses simple and weighted index number calculations. It provides examples of calculating simple price relatives, simple average and aggregate price indexes, and weighted average and aggregate price indexes. Assignment questions at the end ask the reader to calculate different index numbers based on given price and quantity data for multiple time periods and items.

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kaziba stephen
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415 views6 pages

Index Numbers

An index number is used to measure changes in variables like prices over time. The document defines key terms like base year, current year, price relative, and discusses simple and weighted index number calculations. It provides examples of calculating simple price relatives, simple average and aggregate price indexes, and weighted average and aggregate price indexes. Assignment questions at the end ask the reader to calculate different index numbers based on given price and quantity data for multiple time periods and items.

Uploaded by

kaziba stephen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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TOPIC 3: Index numbers

An index number is a statistical measure that shows a change in a variable or


group of variables with respect to time. The period can be in days, week,
months, years. Variables include prices in commodities, wages, salaries, e.t.c

Terms used:

Base year (b): This is a year against which all other years are compared when
getting index numbers.

Current year(c): This is the year for which the index number is being
calculated

Price relative/ relative index numbers:

If Pc denotes price of the commodity in the current year and Pb , denotes price
of the commodity in the base year, then
Pc
Simple relative index/price relative, Pr   100
Pb

Example 1: An article was at a cost of 500/= in 1970 and 800/= in 1990.


Using 1970 as the base year, find the price relative in 1990.

Solution
Pc 800
Pr   100   100  160
Pb 500

Note: The value is written without a percentage sign because it just a number.

Interpretation: The price of a this article increased by 60%

Example 2:

In 1970, the price relative of the commodity using 1986 as the base year was
112, that of the same commodity in 1996 using 1990 as the base year was 85.
What would have been the index/ price relative, in1996using 1986 as the
base year.

Let P0  1986, P1  1990, P2  1996

P2 P P 85 112
Required is  100  2  1    100  95.2
P0 P1 P0 100 100

A group of commodities

1. Simple price index/Simple average price relative: A single price index


number for a group of commodities can be calculated using the average
of price relatives. i.e
Simple average of price relatives= 
Pr
n
Where  P =summation of price relatives, n=number of commodities.
r

It does not take into account the relative importance of the commodities

2. Simple aggregate price index

Simple aggregate price index = 


PC
 100
P b

Where PC =summation of prices of commodities in the current year

 P =summation of the prices of the commodities in the base year


b

It does not take into account the relative importance of commodities.

It ignores units of commodities.

Example 3: Given the information below


Commodity Price in the Price in the
year 2000 year 2003
𝐴 600 800
𝐵 500 600
𝐶 700 1000
𝐷 1200 1600
𝐸 1000 1500
Calculate the simple aggregate price index for 2003 taking 2000 as the
base year.

Solution

Simple aggregate price index= 


PC
 100
P b

800  600  1000  1600  1500


=  137.5
600  500  700  1200  1000

Note: simple average and simple aggregate price index ignore the relative
importance of commodities. Weighing is used to reflect the importance of
each item hence we can use weighted index numbers.

WEIGHTED INDEX NUMBERS

wPr 
a) The weighted average of price relative= 
w
Pr = price relative for each item
W= weight
b) The weighted aggregate price index = 
wPC
 100
 wP
b

Example 3:

The table below shows expenditure in a certain home

commodity Cost in shs weight

1997 1998

Fish(1kg) 1200 1600 4

Beans(1 cup) 800 1200 3

Rice (1kg) 400 500 2

Salt (1kg) 600 300 1


Calculate:

i) Price relatives for each item for 1998 using 1997 as the base year
ii) Weighted average of price relatives. Comment on your result
iii) The weighted aggregate of price index
iv) If the cost of these items in a certain home in 1997 was 1200/= find
the cost in 1998 using the index in iii) above
Solution:
Item Base Curren P  PC  100 Weight w Pr w Pb w PC
r
price t price Pb (w)
Pb PC
Fish 120 1600 133.33 4 533.32 4800 6400
0
Beans 800 1200 150 3 450 2400 3600

Rice 400 500 125 2 250 800 1000

Salt 600 300 50 1 50 600 300

w  wp r  wP b
wPC
 10  1283.32  8600  11300

i) Price relatives for Fish=133.33, for beans=150, for rice=125, for


salt=50
1283.32
ii) Weighted average of price relatives=  128.32 . The cost of
10
these items increased by 28.32%between 1997 and 1998
11300
iii) Weighted aggregate price index=  100  131.395
8600
iv) Let C be the cost of these items in 1998
C
 100  131.395
12000
C  15767.74%
Sometimes we are given weights of different periods; the base period
and the current period. In such a case, the methods that can be used
include:

Paasche aggregate price index= 


WC PC
 100 , where WC is the price in
W P
C b

the current year

Laspeyre aggregate price index= 


Wb PC
, where Wb is the price in the
W P b b

base year.
Note:
 In cases where quantities are used instead of weights the
formulas are the same but for weight ‘W’ we use quantity ‘Q’

 Quantity index, Qr = 
QC
 100
Q b

 Simple average quantity index= 


Qr
n

 Value index= 
Pc QC
 100
PQb b

Assignment 3.1.3

1. The table below shows the prices of items(in ug shs) durind


2010 and 2011
ITEM PRICE PER kg WEIGHT
IN 2010 IN 2011
A 2400 3600 5

B 1500 1800 2

C 1,200 1500 4

Taking prices in 2010 as the base year calculate the:


i) Price relative for each of the item in 2011, hence obtain
the simple price relative for items in 2011
ii) Simple aggregate price index for items in 2011
iii) Weighted average price index for items in 2011
iv) Weighted aggregate price index for items in 2011
2. The price relatives of items for the tear 2011, 2012 and 2013
based on 2010 are 120, 95 and 110 respectively. Compute the
new price relatives for2010, 2011 and 2013 taking 2012 as
the base year
3. The price relatives for 5 items with their respective weights
are as follows.

Items A B C D E

Price relatives 120 y 130 120 125

weights 5 2 4 1 3

Given that the weighted average price index for the items is 127.
Find the:

i) Value of y
ii) Simple price index for the items
4. The prices of three items and quantities sold for two periods
are as follows:
ITEMS 2012 2013

PRICE QUANTITY PRICE QUANTITY

A 2500 5 3000 3

B 3000 2 3500 4

C 4000 3 5000 3

Using 2012 as the base year, calculate the value index of the
items sold in 2013

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