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Index Numbers

An index number is a statistical measure used to compare variables over time or space. It assigns a base value of 100 to represent a reference level and measures changes relative to that. Index numbers help study trends, facilitate comparisons, and act as economic indicators. They are constructed using fixed base, chain base, simple average, weighted aggregate, and weighted average relative methods. Various tests can evaluate the adequacy of an index number, including unit, time reversal, factor reversal, and circular tests.

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47 views14 pages

Index Numbers

An index number is a statistical measure used to compare variables over time or space. It assigns a base value of 100 to represent a reference level and measures changes relative to that. Index numbers help study trends, facilitate comparisons, and act as economic indicators. They are constructed using fixed base, chain base, simple average, weighted aggregate, and weighted average relative methods. Various tests can evaluate the adequacy of an index number, including unit, time reversal, factor reversal, and circular tests.

Uploaded by

thakurarmaan912
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INDEX NUMBER

Meaning of Index Number


An index number is a method of evaluating variations in a variable or group of variables in regards to
geographical location, time, and other features. The base value of the index number is usually 100, which
indicates price, date, level of production, and more.

There are various kinds of index numbers. However, at present, the most relatable is the price index number
that particularly indicates the changes in the overall price level (or in the value of money) for a particular time.

Here, the value of money is not constant, even if it falls or rises it will affect and change the price level. An
increase in the price level determines a decline in the value of money. A decrease in the price level means an
increase in the value of money.

Therefore, the differences in the value of money are indicated by the differences in the overall price level for a
particular time. Therefore, the changes in the overall prices can be evaluated by a statistical device known as
‘index number.’
Uses of Index Number
Index numbers are one of the most widely used statistical tools. Some of the advantages or uses of index
numbers are as follows:

• Help in formulating policies

• Help in study of trends

• Helpful in forecasting

• Facilitates comparative study

• Act as economic barometer


FIXED BASE & CHAIN BASE METHOD
Methods for Constructing the Index Number

Price Index Number


SIMPLE (UNWEIGHTED) PRICE INDEX : Simple Aggregative Price Index
The following are the two sets of retail price of a family’s shopping basket. The data pertain to retail price
during 2009 and 2010. Calculate the simple (unweighted) price index for 2010 using 2009 as the base year.
Commodity Unit Price (in Rs.)
2009 2010

Milk (1 litre) 30 35

Eggs (1 dozen) 20 22

Butter (1 kg) 150 170

Bread (500 gm) 12 14


SIMPLE (UNWEIGHTED) PRICE INDEX : Simple Average Price Relative Index
From the data given below, construct the index of price relatives for the year 2002 taking 2001 as the base year.
Expenses on Price (in Rs.) 2010 Price (in Rs.) 2011

Food 3000 3200

Rent 2200 2400

Clothing 1900 2100

Education 1600 1700

Misc. 1900 2100


FIXED BASE & CHAIN BASE METHOD
From the data given below, construct the index number using fixed base and chain base method.
YEAR WAGES

2008 275

2009 284

2010 289

2011 293

2012 297

2013 313

2014 328

2015 345
WEIGHTED PRICE INDEX : Weighted Aggregative Price Index
Methods to determine Weighted Aggregative Price Index

• Laspeyre’s Method

• Paasche’s Method

• Fisher’s Ideal Method

• Dorbish – Bowley’s Method

• Marshall – Edgeworth’s Method

• Walsch’s Method

• Kelly’s Method
Compute the price index number using Laspeyre’s, Paasche’s, Dorbish – Bowley’s Method, Fisher’s method and
Marshall-Edgeworth’s method, Walsch’s Method and Kelly’s Method from the following information:
(Taking 2008 as the base year)
2008 2009
Commodity
Price Quantity Price Quantity

A 20 8 40 6

B 50 10 60 5

C 40 15 50 15

D 20 20 20 15
WEIGHTED PRICE INDEX : Weighted Average Price Relative Index
Calculate the index number by weighted relatives method from the following data for the
year 2019 with 2011 as the base year.

Commodity 𝒒𝟎 Price in 2011 Price in 2019


(in Rs.) (in Rs.)

A 80 5 8
B 65 8 14
C 42 12 18
D 37 4 5
E 31 4 5
F 15 2 4
TEST OF ADEQUACY OF INDEX NUMBER

The decision makers always face the problem of selecting an appropriate method for the
construction of an index number in a given situation. However, following tests have been
suggested to select the adequacy of an index number:

• Unit Test

• Time Reversal Test

• Factor Reversal Test

• Circular Test
Construct the Fisher’s price index using following data and show how it satisfies the time and factor reversal
tests.

2002 2003
Commodity
Price Quantity Price Quantity

A 20 12 30 14

B 13 14 15 20

C 12 10 20 15

D 8 6 10 4

E 5 8 5 6

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