Index Numbers and
time Based data
Basic Concepts
BASIC CONCEPTS AND IMPORTANT RESULTS
Index Numbers
Index number is a specialised average designed to measure the change on the level of an
activity or item either with respect to time or geographic location or some other characteristic.
Characteristics of Index Numbers
They are expressed as ratio or percentage
They are specialised averages
They measure the change in the level of a phenomenon.
They measure the effect of change over a period of time.
Classification of Index Numbers
The index numbers are classified as (i) Price Index (ii) Quantity indexes (iii) Value index
(iv)Special purpose index
Methods of Construction of Index
Index Numbers (i)Unweighted (or simple) – (a) Simple Aggregative
(b) Simple average of price relatives
(ii) Weighted (or Arithmetic Mean Method) – (a) Weighted Aggregate
(b) Weighted average of price relatives
Σ𝑝1
(i) Simple aggregative method : 𝑃01 = 𝑥 100 , where 𝑃01 = Index number of current year .
Σ𝑝0
Σ𝑝1 = Sum of prices of all items in the current year, Σ𝑝0 = Sum of prices of all items in the base year
𝑝1
Σ(𝑝0 𝑥 100)
(ii) Simple average of price relatives method : 𝑃01 = where N number of items
𝑁
(iii) Weighted aggregative method :
(a) If along with base prices and current prices of a number of the weight of each item are given,
Σ𝑝
𝑃01 = 1𝑤 𝑥 100 , where w = weight of items
Σ𝑝0 𝑤
σ𝑝 𝑞
(b) Laspeyre's index number. In this method the quantities of the base year (𝑞0 ) are taken as nights 𝑃01 = σ 𝑝1 𝑞0 x 100
0 0
σ 𝑝1 𝑞1
(c) Paasche's index number. In this method the quantities of the current year (𝑞1 ) are taken as weights 𝑃01 = σ 𝑝0 𝑞1
x 100
(d) Fisher's ideal index number. The grometric mean of Laspeyre's and Pasche's indexnumbers is known as Fisher's
σ 𝑝1 𝑞0 σ 𝑝1 𝑞1
ideal index number. 𝑥
σ 𝑝0 𝑞0 σ 𝑝0 𝑞1
x 100
(e) Marshall-Edgeworth's index number. In this method the average of quantities of the current year and the base
σ 𝑝1 (𝑞0 +𝑞1 )
year is taken as weights. σ x 100
𝑝0 (𝑞0 +𝑞1 )
Σ𝐼𝑤 𝑝1
(iv) Weighted average of price relatives method : : 𝑃01 = , where I = x 100 and w = weight
Σ𝑤 𝑝0
Test of adequacy of Index Numbers :
There are test to check consistency , to verify adequacy of Index Numbers
(i) Unit Test
(ii) Time Reversal Test
(iii) Factor reversal test
(iv) Circular test
Time reversal test : 𝑃01 x 𝑃10 = 1
Here 𝑃01 = Index number of current year on the basis of base year
And 𝑃10 = Index number of base year on the basis of current year
Time Series :
There is a special significance of time in economic and commercial world because with time various kinds of
changes can be seen in these fields, like increase in population, rise or fall in production cost etc. To check these
changes, the basis of measure of time is one year, one month, one week, one day, one hour, one minute etc. In
simple words, the organized series of data on the basis of any measure of time is called time series.
Time series is used in statistics, pattern recognition, weather forecasting, earthquake prediction, astronomy etc.
Components of Time Series: . The pattern of data in time series is influenced by a large variety of factors. The
usual assumptions that four components trend, cyclical, seasonal and irregular combine to provide specific
values for In time series,
(i)Trend component:
the measurements may be taken every hour, day, week, month or year or at any other regular interval. Although
time series data generally exhibit random fluctuations, the time series may show gradual shifts to relatively
higher or lower values over a long period of time. The gradual shifting of the time series is called trend in the time
series. The symbol "T is used to denote long term trend.
(ii) Cyclical component:
Although a time series may exhibit a trend over long period of time. All future values of the time series will not
fall exactly on the trend line. In fact, time series show rise and fall of the values in a short period of time. The
variations in a time series which operate themselves over a span of more than one your are called cyclic
variations. For example, rise and fall of share market. Many time series exhibit cyclical behaviour with regular
runs of observations below and above the trend line Cyclical component of the time series is denoted by symbol
C
Seasonal Component:
Whereas the trend and cyclical components of a time series are identified by analyzing multiyear variations, many
time series show a regular pattern over one year period. For example, sale of soft drinks and ice creams is higher in
summer than in winter, crockery sales are higher in festival season (Diwali, Christmas etc.) than other times. The
component of the time series that represents the variability in the data due to seasonal influence is called seasonal
component. It is denoted by symbol "S".
Irregular Component:
The irregular component of the time series is the factor which causes the variations that are not regular I.e random
or irregular. These variations are unforeseen, uncontrollable and unpredictable. Irregular or random fluctuations
occur accidently in the time series. For example, with sudden ban on mustard oil, soya oil shows a marked upward
sales, irregular fall in crop yield due to floods. unusual rise in income of printing press due to announcement of
election, decline in profits due to broke of fire in the factory, decrease in production due to sudden strike etc. It is
denoted by symbol T.
Time Series Analysis :
Time series analysis comprises methods for analyzing time series data in order to extract meaningful Statistics and other
characteristics of the data .In other words, the main aim of the time series analysis is to derive conclusions after arranging the
time series in a systematic manner. The objective of time series analysis is to provide good forecasts or predictions of future
values of the time
Models of time series analysis:
Additive Model : This model is based on the assumption that the sum of four components is equal to original value i.e. O =
T+C+S+L
Multiplicative Model : This model is based on the assumption that the multiplication of four components is equal to original
value i.e. O = T+C+S+L
