Module 2

Index Numbers
Index numbers are statistical devices designed to measure the relative changes in the level of a
phenomenon (variable or a group of variables) with respect to time, geographical location,
income, etc. over a specified period of time.
It was developed for measuring the effect of change in prices. i. e. to measure increase/decrease
of any industrial production, rise/fall of price of a commodity. It acts as a barometer of
economic activity. So by going through the index numbers, one can have an idea about what is
happening to the economy of any industry, business, agricultural production and in many other
fields.
The following table shows the comparison of sales of a product from 2001 to 2004

Years Sales(in Index number

thousands)
2001 70 100
2002 68 97.1
2003 75 107.1
2004 80 114.3
Problems in the construction of index numbers:
1. The purpose of the index
2. Selection of a base period
3. Selection of items
4. Price quotations
5. Choice of an average
6. Selection of appropriate weights
7. Selection of an appropriate formula
Types of index numbers:
1. Price index numbers
2. Quantity index numbers
3. Value index numbers
Note:
• Base period: It is the period selected for comparisons of the relative changes in the level
of a phenomenon from time to time. Index for base period is always taken as 100.
Methods of constructing index numbers:
Price index numbers: This measures relative change in the price level of the commodity over
a period & is denoted by P01 i.e. price index at the current period as compared to price at the
base period.
 1. Unweighted index numbers
i. Simple aggregative method: It is aggregate of prices in current period
expressed as a percentage of aggregate of prices in the base period & the
formula is given by
∑ 𝑝1
𝑃01 = × 100
∑ 𝑝0

Where 𝑃01 = price index, 𝑝1 = price in the current period & 𝑝0 = price in the

base period
ii. Simple average of relatives method:
∑𝑃 𝑝1
a. Using arithmetic mean: 𝑃01 = where 𝑃= × 100-price
𝑛 𝑝0
relative & n- number of items
∑ 𝑙𝑜𝑔𝑃
b. Using geometric mean: 𝑃01 = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔 ( )
𝑛

1. For the following data calculate the index number by simple aggregate method

Commodity A B C D
Price in 1980(Rs.) 162 256 257 132
Price in 1981(Rs.) 171 164 189 145
Solution:

Commodity Price(in Rs)

1980(𝑝0 ) 1981(𝑝1 )
A 162 171
B 256 164
C 257 189
D 132 145
Total ∑ 𝑝0 ∑ 𝑝1
= 807 = 669
∑ 𝑝1
𝑃01 = × 100 = 82.90
∑ 𝑝0

2. From the following data calculate index number by taking 2002 as the base year

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003
Price of 4 5 6 7 8 10 9 10 11
commodity ‘X’
Solution:

Year Price of Index Year Price of Index

commodity number commodity number
‘X’ ‘X’
1995 4 40 2000 10 100
1996 5 50 2001 9 90
1997 6 60 2002 10 100
1998 7 70 2003 11 110
1999 8 80

3. From the following data, construct an index for 2003 taking 2002 as base by the average
of relative method using both arithmetic mean & geometric mean.

Commodity A B C D E
Price in 2002(Rs.) 50 40 80 110 20
Price in 2003(Rs.) 70 60 90 120 20
Solution:

Commodity Price in Price in Price relative logP(base 10)

2002(Rs.) 2003(Rs.) 𝑝1
𝑃 = (𝑝 × 100)
0

A 50 70 140 2.1461
B 40 60 150 2.1761
C 80 90 112 2.0512
D 110 120 109 2.0378
E 20 20 100 2.0000
Total 611 10.4112

∑𝑃
𝑃01 = = 122.32
𝑛
∑ 𝑙𝑜𝑔𝑃
𝑃01 = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔 ( ) = 120.9
𝑛

2. Weighted price index numbers

i. Weighted aggregative method:
𝑃01 = price index
𝑝1 = price in the current period
𝑝0 = price in the base period
𝑞0 = quantity in the base period
𝑞1 = quantity in the current period

∑𝑝 𝑞
• Laspeyres method: 𝑃01 𝐿𝑎 = ∑ 𝑝1𝑞0 × 100
0 0
∑ 𝑝1 𝑞1
• Paasche method: 𝑃01 𝑃𝑎
= ∑𝑝 × 100
0 𝑞1
 • Dorbish & Bowley’s method: It is arithmetic mean of the above two.
i. e.
𝑃01 𝐿𝑎 + 𝑃01 𝑃𝑎
𝑃01 =
2
• Fisher’s price index method: It is geometric mean of the first two.
i.e.

𝑃01 𝐹 = √ 𝑃01 𝐿𝑎 × 𝑃01 𝑃𝑎

ii. Weighted average of price relative method

∑ 𝑃𝑊
a. Using arithmetic mean: 𝑃01 = ∑𝑊
where P is price relative & W is the
weights
∑ 𝑊 𝑙𝑜𝑔𝑃
b. Using geometric mean: 𝑃01 = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔 ( ∑𝑊
)

Problems:
4. Construct index numbers of price from the following data by applying
• Laspeyres method
• Paasche method
• Dorbish & Bowley’s method
• Fisher’s ideal method
Commodity 2002 2003
price quantity price quantity
A 2 8 4 6
B 5 10 6 5
C 4 14 5 10
D 2 19 2 3
Solution:
Commodity 2002 2003
(𝑝0 ) (𝑞0 ) (𝑝1 ) (𝑞1 ) 𝑝1 𝑞0 𝑝0 𝑞0 𝑝1 𝑞1 𝑝0 𝑞1
A 2 8 4 6 32 16 24 12
B 5 10 6 5 60 50 30 25
C 4 14 5 10 70 56 50 40
D 2 19 2 13 38 38 26 26
Total 200 160 130 103

∑𝑝 𝑞 ∑𝑝 𝑞
𝑃01 𝐿𝑎 = ∑ 𝑝1 𝑞0 × 100 = 125 𝑃01 𝑃𝑎 = ∑ 𝑝1𝑞1 × 100 = 126.21
0 0 0 1

𝑃01 𝐿𝑎 +𝑃01 𝑃𝑎
𝑃01 = = 125.6 𝑃01 𝐹 = √ 𝑃01 𝐿𝑎 × 𝑃01 𝑃𝑎 = 126.6
2
 5. The prices of agricultural commodities for 1946-47 and for the month of December
1950 are given below along with the value of the output of these commodities in 1946-
47.

Commodities Prices Value of output in millions (Rs)

1946-47(Rs) Dec 1950(Rs) 1946-47
Rice 13.75 13.75 8364
Wheat 9.70 9.70 2207
Jowar 6.03 8 876
Cotton(raw) 466 433 701
Tea 1.25 1.75 534
Calculate the weighted index number of prices of these commodities for December
1950 taking 1946-47 as base.
Solution:

Commodities 𝑝0 𝑝1 𝑝0 𝑞0 𝑞0 𝑝1 𝑞0
Rice 13.75 13.75 8364 608.29 8363.99
Wheat 9.70 9.70 2207 227.53 2207.00
Jowar 6.03 8 876 145.27 1162.16
Cotton(raw) 466 433 701 1.50 649.50
Tea 1.25 1.75 534 427.20 747.60
Total 12682 13130.25
∑ 𝑝1 𝑞0 13130.25
𝑃01 𝐿𝑎 = × 100 = × 100 = 103.53
∑ 𝑝0 𝑞0 12682
6. From the data given below, construct index number of the group of four commodities
by using Fisher’s ideal index formula
Base year Current year
Commodities Price per Expenditure(Rs) Price per Expenditure(Rs)
unit(Rs) unit(Rs)
A 2 40 5 75
B 4 16 8 40
C 1 10 2 24
D 5 25 10 60
Solution:

Base year Current year

Commodities 𝑝0 𝑝0 𝑞0 𝑞0 𝑝1 𝑝1 𝑞1 𝑞1 𝑝1 𝑞0 𝑝0 𝑞1
A 2 40 20 5 75 15 100 30
B 4 16 4 8 40 5 32 20
C 1 10 10 2 24 12 20 12
D 5 25 5 10 60 6 50 30
Total 91 199 202 92
 ∑ 𝑝1 𝑞0 ∑ 𝑝1 𝑞1 202 199
𝑃01 𝐹 = √ 𝑃01 𝐿𝑎 × 𝑃01 𝑃𝑎 = √ × × 100 = √ × × 100 = 219.12
∑ 𝑝0 𝑞0 ∑ 𝑝0 𝑞1 91 92
7. An enquiry into the budgets of middle-class families, a family gave the following
information

Expenses on Food Rent Clothing Fuel Others

Quantity 30% 15% 20% 10% 25%
Prices in 1997(in Rs) 100 20 70 20 40
Prices in 1998(in Rs) 90 20 60 15 55
Compute the price index number using
i. Weighted AM of price relatives
ii. Weighted GM of price relatives
Solution:

Expenses W 1997(𝑝0 ) 1998(𝑝1) Price relative WP logP WlogP

on 𝑝1
𝑃 = × 100
𝑝0
Food 30 100 90 90 2700 1.9542 58.626
Rent 15 20 20 100 1500 2.0000 30.000
Clothing 20 70 60 85 1714 1.9330 38.660
Fuel 10 20 15 75 750 1.8751 18.751
others 25 40 55 137.5 3437.5 2.1383 53.457
Total 10101.5 199.494

∑ 𝑃𝑊 ∑ 𝑊 𝑙𝑜𝑔𝑃
𝑃01 (𝐴𝑀) = ∑𝑊
= 101.015 𝑃01 (𝐺𝑀) = 𝑎𝑛𝑡𝑖𝑙𝑜𝑔 ( ∑𝑊
) = 98.83

Kelly’s price index or fixed weights index: This formula requires the weights to be fixed for
∑𝑝 𝑞
all periods and is given by 𝑃01 𝐾 = ∑ 𝑝1𝑞 × 100
0

Where the weights are the quantities which may refer to some period the base year or the
current period and are kept constant for all periods. The average of the quantities consumed of
two, three or more years may be used as weights.
8. Calculate the weighted price index from the following data
Material Units Quantity required Prices
required 1963 1973
Cement 100lb 500 5 8
Timber c.ft. 2000 9.5 14.2
Steel sheets cwt 50 34 42.20
Bricks Per ‘000 20000 12 24
Solution:

Material 𝑞 Prices
required 1963(𝑝0 ) 1973(𝑝1 ) 𝑝0 𝑞 𝑝1 𝑞
Cement 5 5 8 25 40
Timber 2000 9.5 14.2 19000 28400
Steel sheets 50 34 42.20 1700 2100
Bricks 20 12 24 240 480

∑ 𝑝1 𝑞
𝑃01 𝐾 = × 100 = 147.96
∑ 𝑝0 𝑞
9. By using the average of the quantities of two years as weights, compute the price index
Quantities Price(Rs)
Commodity 2002 2003 2002 2003
A 10 16 20 25
B 9 7 25 28
C 20 24 40 40
Solution:

Commodity 𝑞1 + 𝑞2 2002(𝑝0 ) 2003(𝑝1 )

𝑞=
2
A 13 20 25
B 8 25 28
C 22 40 40

∑ 𝑝1 𝑞
𝑃01 𝐾 = × 100 = 106.64
∑ 𝑝0 𝑞

Quantity index number: It reflects the relative changes in the quantity or volume of goods
produced, consumed, distributed in any given year w.r.to some base year. The same formulae
are used by interchanging price(p) and quantity(q)
∑ 𝑝0 𝑞1
𝑄01 𝐿𝑎 = × 100
∑ 𝑝0 𝑞0
∑ 𝑝1 𝑞1
𝑄01 𝑃𝑎 = × 100
∑ 𝑝1 𝑞0

𝑄01 𝐹 = √ 𝑄01 𝐿𝑎 × 𝑄01 𝑃𝑎

Value index number: It is obtained on expressing the total value in any given year as a
percentage of the same in the base year.
∑ 𝑝1 𝑞1
𝑉01 = × 100
∑ 𝑝0 𝑞0
 10. Compute by Fisher’s formula the quantity index number from the data given below
Articles 1994 1996
Price(Rs) Total value(Rs) Price(Rs) Total value(Rs)
A 5 50 4 48
B 8 48 7 49
C 6 18 5 20
Solution: Total value=pricequantity

Articles 1994 1996

Price(𝑝0 ) Total 𝑞0 Price(𝑝1) Total 𝑞1 𝑝0 𝑞1 𝑝1 𝑞0
value(𝑝0 𝑞0 ) value(𝑝1 𝑞1 )
A 5 50 10 4 48 12 60 40
B 8 48 6 7 49 7 56 42
C 6 18 3 5 20 4 24 15
Total 116 117 140 97
∑ 𝑝0 𝑞1 ∑ 𝑝1 𝑞1
𝑄01 𝐹 = √ 𝑄01 𝐿𝑎 × 𝑄01 𝑃𝑎 = √ × × 100 = 120.65
∑ 𝑝0 𝑞0 ∑ 𝑝1 𝑞0
11. Compute price index and quantity index numbers for the year 2000 with 1995 as base
year using Fisher’s price index method.
Commodity Quantity(units) Value(Rs)
1995 2000 1995 2000
A 100 150 500 900
B 80 100 320 500
C 60 72 150 360
D 30 33 360 297
Test of adequacy of index number formulae: In order to compare the adequacy of various
index numbers, certain tests have been evolved
1. Unit test
2. Time reversal test
3. Factor reversal test
4. Circular test
1. Unit test: This test requires that the index number should be independent of the units
in which the prices or quantity of various commodities are quoted. This is because the
index number is the ratio of two quantities and indicates only the relative change not
the absolute change. All the formulae except the index number based on simple
aggregative of prices/quantities satisfy this test.
2. Time reversal test: If the index numbers are computed for the same data relating to
two periods by the same formula but with bases reversed then the two index numbers
so obtained should be the reciprocal of each other.
i.e. 𝑃01 × 𝑃10 = 1
The Fisher’s ideal index number method satisfies the adequacy criterion of the time
reversal test.
 3. Factor reversal test: This implies that if the price and quantity indices are obtained
for the same data, same base and current periods and using the same formula then their
product is equal to the ratio of the total value (price X quantity) in the current year to
the value in the base year.
∑𝑝 𝑞
i.e. 𝑃01 × 𝑄01 = ∑ 𝑝1𝑞1 = 𝑉01
0 0

The Fisher’s ideal index number method satisfies the adequacy criterion of the factor
reversal Test.
4. Circular test: This is an extension of time reversal test for more than two periods and
is based on the shiftability of the base period. This requires the index to work in a
circular manner and this property enables us to find the index numbers from period to
period without referring back to the original base each time. For three periods a, b, c
the test requires
𝑃𝑎𝑏 × 𝑃𝑏𝑐 × 𝑃𝑐𝑎 = 1, 𝑎 ≠ 𝑏 ≠ 𝑐
Where 𝑃𝑖𝑗 is the price index(without factor 100) for period j with period i as base
𝑃01 × 𝑃12 × 𝑃20 = 1
This test is not satisfied by any of the weighted aggregative formulae with changing
weights. This test is satisfied only by the index number formulae based on
i. Simple geometric mean of the price relatives
ii. Kelly’s fixed base method
Problems:
1. For the following data, prove that the Fisher’s ideal index satisfies both the time reversal
test and the factor reversal test.
Commodity Base year Current year
Price Quantity Price Quantity
A 6 50 10 56
B 2 100 2 120
C 4 60 6 60
D 10 30 12 24
Solution:

Commodity Base year Current 𝑝0 𝑞0 𝑝0 𝑞1 𝑝1 𝑞0 𝑝1 𝑞1

year
𝑝0 𝑞0 𝑝1 𝑞1
A 6 50 10 56 300 336 500 560
B 2 100 2 120 200 240 200 240
C 4 60 6 60 240 240 360 360
D 10 30 12 24 300 240 360 288
∑ 𝑝1 𝑞0 ∑ 𝑝1 𝑞1
𝑃01 𝐹 = √ × × 100 = 136.83 = 1.3683(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝0 𝑞0 ∑ 𝑝0 𝑞1
 ∑ 𝑝0 𝑞1 ∑ 𝑝0 𝑞0
𝑃10 𝐹 = √ × × 100 = 73.08 = 0.7308(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝1 𝑞1 ∑ 𝑝1 𝑞0

𝑷𝟎𝟏 𝑭 × 𝑷𝟏𝟎 𝑭 = 𝟏
2. Calculate Laspeyre’s, Paasche’s & Fisher’s indices for the following data. Also examine
which of the above indices satisfy Time reversal & factor reversal tests.
Commodity Base year Current year
Price Quantity Price Quantity
A 6.5 500 10.8 560
B 2.8 124 2.9 148
C 4.7 69 8.2 78
D 10.9 38 13.4 24
E 8.6 49 10.8 27
Solution:

Commodity Base year Current year

𝑝0 𝑞0 𝑝1 𝑞1 𝑝0 𝑞0 𝑝0 𝑞1 𝑝1 𝑞0 𝑝1 𝑞1
A 6.5 500 10.8 560 3250 3640 5400 6.48
B 2.8 124 2.9 148 347.2 414.4 359.6 429.2
C 4.7 69 8.2 78 324.3 366.6 565.8 639.6
D 10.9 38 13.4 24 414.2 261.6 509.2 321.6
E 8.6 49 10.8 27 421.4 232.2 529.2 291.6
∑ 𝑝1 𝑞0
𝑃01 𝐿𝑎 = × 100 = 154.8 = 1.548(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝0 𝑞0
∑ 𝑝1 𝑞1
𝑃01 𝑃𝑎 = × 100 = 157.28 = 1.5728(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝0 𝑞1

𝑃01 𝐹 = √ 𝑃01 𝐿𝑎 × 𝑃01 𝑃𝑎 = 156.03 = 1.5603(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)

∑ 𝑝0 𝑞1
𝑄01 𝐿𝑎 = × 100 = 101.21 = 1.0121(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝0 𝑞0
∑ 𝑝1 𝑞1
𝑄01 𝑃𝑎 = × 100 = 104.97 = 1.0497(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝1 𝑞0

𝑄01 𝐹 = √ 𝑄01 𝐿𝑎 × 𝑄01 𝑃𝑎 = 103.01 = 1.0301(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)

Time reversal:
∑ 𝑝0 𝑞1
𝑃10 𝐿𝑎 = × 100 = 63.58 = 0.6358(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝1 𝑞1
∑ 𝑝0 𝑞0
𝑃10 𝑃𝑎 = × 100 = 64.60 = 0.646(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)
∑ 𝑝1 𝑞0
 𝑃10 𝐹 = √ 𝑃10 𝐿𝑎 × 𝑃10 𝑃𝑎 = 64.08 = 0.6408(𝑤𝑖𝑡ℎ𝑜𝑢𝑡 100 𝑓𝑎𝑐𝑡𝑜𝑟)

𝑃01 𝐿𝑎 × 𝑃10 𝐿𝑎 ≠ 1

𝑃01 𝑃𝑎 × 𝑃10 𝑃𝑎 ≠ 1

𝑃01 𝐹 × 𝑃10 𝐹 = 1
Factor reversal:
∑ 𝑝1 𝑞1
𝑉01 = = 1.6249
∑ 𝑝0 𝑞0

𝑃01 𝐿𝑎 × 𝑄01 𝐿𝑎 = 1.5667 ≠ 𝑉01

𝑃01 𝑃𝑎 × 𝑄01 𝑃𝑎 = 1.6510 ≠ 𝑉01

𝑃01 𝐹 × 𝑄01 𝐹 = 1.6073 = 𝑉01

3. Calculate the index number on the basis of geometric mean of price relative using the
circular test

Commodity Prices in Rs
1999 2000 2001
A 20 30 40
B 30 35 45
C 20 30 50
D 10 15 30
Solution:
Commodity Prices in Rs 𝑃1 𝑃2 𝑃3 𝑙𝑜𝑔𝑃1 𝑙𝑜𝑔𝑃2 𝑙𝑜𝑔𝑃3
𝑝1 𝑝2 𝑝0
1999 2000 2001 = ( × 100) = ( × 100) = ( × 100)
𝑝0 𝑝1 𝑝2
𝑝0 𝑝1 𝑝2
A 20 30 40 1.5 1.33 0.5 0.17 0.12 -0.301
B 30 35 45 1.166 1.28 0.66 0.06 0.10 -0.1804
C 20 30 50 1.5 1.66 0.4 0.17 0.22 -0.397
D 10 15 30 1.5 2 0.33 0.17 0.30 -0.4814

∑ 𝑙𝑜𝑔𝑃1
𝑃01 = 𝐴𝑛𝑡𝑖𝑙𝑜𝑔 ( ) = 1.4060
𝑛
∑ 𝑙𝑜𝑔𝑃2
𝑃12 = 𝐴𝑛𝑡𝑖𝑙𝑜𝑔 ( ) = 1.5408
𝑛
∑ 𝑙𝑜𝑔𝑃3
𝑃20 = 𝐴𝑛𝑡𝑖𝑙𝑜𝑔 ( ) = 0.4571
𝑛

𝑃01 × 𝑃12 × 𝑃20 = 1

4. Verify circular test for the given data given below by taking average of three years quantity
2020 2021 2022
Commodity
P Q P Q P Q
A 2 8 4 6 6 5
B 5 10 6 5 7 5
C 4 14 5 10 8 9
D 2 19 2 13 3 10
Solution:
𝑄1 + 𝑄2 + 𝑄3
2020 2021 2022 𝑞=
Commodity 3
𝑝0 Q1 𝑝1 Q2 𝑝2 Q3
A 2 8 4 6 6 5 6.333
B 5 10 6 5 7 5 6.667
C 4 14 5 10 8 9 11
D 2 19 2 13 3 10 14

∑ 𝑝1 𝑞
𝑃01 𝐾 = = 1.257
∑ 𝑝0 𝑞
∑ 𝑝2 𝑞
𝑃12 𝐾 = = 1.447
∑ 𝑝1 𝑞
∑ 𝑝0 𝑞
𝑃20 𝐾 = = 0.5496
∑ 𝑝2 𝑞

𝑃01 × 𝑃12 × 𝑃20 = 1

Chain index numbers: The fixed base index method reflects the relative change in the
phenomenon in current period with its changes in base year. In chain base method, a series of
index numbers for each year with the preceding year as the base year.

i.e. 𝑃01 , 𝑃12 , 𝑃23 , … 𝑃(𝑟−1)𝑟 if the data is given for (r+1) periods. These indices are called link
index number or link relatives.
Each basic chain index is obtained from these link relatives by successive multiplication.
Construction of chain index numbers:

• For each commodity express the price in any year as a percentage of its price in the
preceding year.
𝑃𝑖
Link relative (L. R.) for period i= 𝑃 × 100(𝑖 = 1, 2, … 𝑟)
𝑖−1
 • Chain base indices (C.B.I) are obtained on multiplying the L. R. successively.
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟𝐿.𝑅.×𝑝𝑟𝑒𝑐𝑒𝑒𝑑𝑖𝑛𝑔 𝑦𝑒𝑎𝑟 𝐶.𝐵.𝐼
C.B.I. for any year = 100
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝐶.𝐵.𝐼.×𝑝𝑟𝑒𝑐𝑒𝑒𝑑𝑖𝑛𝑔 𝑦𝑒𝑎𝑟 𝐹.𝐵.𝐼
• Current year F.B.I. = 100

Note:

• F.B.I, for the first period being same as C.B.I. for the first period.
• In case of more than one commodity in a year, then use average of link relatives of
current year

To find Chain index number:

Year Price Link Relatives Chain Indices
𝑝0
𝑦0 𝑝0 𝑋 100 = 𝐴(= 100) 𝐶0 (= 100)
𝑝0
𝑝1 𝐵𝑋𝐶0
𝑦1 𝑝1 𝑋 100 = 𝐵 = 𝐶1
𝑝0 100
𝑝2 𝐶𝑋𝐶1
𝑦2 𝑝2 𝑋 100 = 𝐶 = 𝐶2
𝑝1 100
𝑝3 𝐷𝑋𝐶2
𝑦3 𝑝3 𝑋 100 = 𝐷 = 𝐶3
𝑝2 100

To convert chain base index to fixed index:

Year Chain base index Fixed base index

𝑦0 𝐶0 𝑓0 (= 𝐶0 )

𝐶1 𝑋𝑓0
𝑦1 𝐶1 = 𝑓1
100
𝐶2 𝑋𝑓1
𝑦2 𝐶2 = 𝑓2
100
𝐶3 𝑋𝑓2
𝑦3 𝐶3 = 𝑓3
100
. . .

. . .
To find Chain index number for the group data:

Year 𝑦1 𝑦2 𝑦3 𝑦4

Link Relative

Link Relative

Link Relative

Link Relative
Group
Price

Price

Price

Price
𝑝1 𝑝2 𝑝3
I 𝑝0 100 𝑝1 𝑋100 𝑝2 𝑋100 𝑝3 𝑋100
𝑝0 𝑝1 𝑝2

𝑝5 𝑝6 𝑝7
II 𝑝4 100 𝑝5 𝑋100 𝑝6 𝑋100 𝑝7 𝑋100
𝑝4 𝑝5 𝑝6

𝑝9 𝑝10 𝑝11
III 𝑝8 100 𝑝9 𝑋100 𝑝10 𝑋100 𝑝11 𝑋100
𝑝8 𝑝9 𝑝10
Average
Link - 100 - A - B - C
relative
Chain 𝐶0 𝑋 𝐴 𝐶1 𝑋 𝐵 𝐶2 𝑋 𝐶
Indices
-- 𝐶0 = (100) 100 -- 100 -- 100
chained to
= 𝐶1 = 𝐶2 = 𝐶3
𝑦1

Problems:
1. Find the chain base indices from the following data
Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Price 37 39 43 48 48 52 48 49 54 56 57

Solution:

Year Price Link relatives Chain index

2013 37 100 100
2014 39 39 105.41 × 100
× 100 = 105.41
37 100
= 105.41
2015 43 43 110.26 × 105.41
× 100 = 110.26
39 100
= 116.22
 2016 48 48 116.22 × 111.63
× 100 = 111.63
43 100
= 129.73
2017 48 48 100 × 129.73
× 100 = 100
48 100
= 129.73
2018 52 52 108.33 × 129.73
× 100 = 108.33
48 100
= 140.54
2019 48 92.31 129.73
2020 49 102.08 132.43
2021 54 110.20 145.94
2022 56 103.7 151.34
2023 57 101.79 154.05

2. From the following data of the whole sale prices of wheat for 10 years, construct index
numbers by taking a) 1994 as base year b) Chain base method
Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Price 50 60 62 65 70 78 82 84 88 90

Solution:
1. a) 1994 as base year
Year Price Index number
1994 50 100
1995 60 60 × 100
= 120
50
1996 62 62 × 100
= 124
50
1997 65 130
1998 70 140
1999 78 156
2000 82 164
2001 84 168
2002 88 176
2003 90 180
 b) Chain base method
Year Price Link relatives Chain index
1994 50 100 100
1995 60 60 120 × 100
× 100 = 120 = 120
50 100
1996 62 62 103.33 × 120
× 100 = 103.33 = 124
60 100
1997 65 104.84 130
1998 70 107.69 140
1999 78 111.43 156
2000 82 105.13 164
2001 84 102.44 168
2002 88 104.76 176
2003 90 102.27 180

2. From the chain base index numbers given below, find fixed base indices.
Year 1995 1996 1997 1998 1999
Chain base index 80 110 120 90 140
Solution:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝐶.𝐵.𝐼.×𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟 𝐹.𝐵.𝐼
Current year F.B.I. = 100

Year Chain index Fixed base index number

number
1995 80 80
1996 110 80 × 110
= 88
100
1997 120 88 × 120
= 105.6
100
1998 90 105.6 × 90
= 95.04
100
1999 140 95.04 × 140
= 133.06
100
3. From the following prices of three groups of commodities for the year 1995 to 1999,
find the chain base index numbers chained to 1995.Also find the fixed base index
numbers with 1995 as base year.
Groups 1995 1996 1997 1998 1999
I 4 6 8 10 12
II 16 20 24 30 36
III 8 10 16 20 24
 Solution:
Computation of Chain base index
Group Link Relatives based on preceding year
1995 1996 1997 1998 1999
I 100 6 8 10 12
× 100 = 150 × 100 = 133.33 × 100 = 125 × 100 = 120
4 6 8 10
II 100 20 24 30 36
× 100 × 100 = 120 × 100 = 125 × 100 = 120
16 20 24 30
= 125
III 100 10 16 20 24
× 100 × 100 = 160 × 100 = 125 × 100 = 120
8 10 16 20
= 125
Total L.R. 300 400 413.33 375 360
Average 100 133.33 137.78 125 120
L.R.
Chain 100 100 × 133.33 137.78 × 133.33 125 × 183.70 120 × 229.63
indices 100 100 100 100
= 133.33 = 183.70 = 229.63 = 275.56
Computation of fixed base index
Group Price relatives(1995=100)
1995 1996 1997 1998 1999
I 100 6 8 10 12
× 100 = 150 × 100 = 200 × 100 = 250 × 100 = 300
4 4 4 4
II 100 20 24 30 36
× 100 × 100 = 150 × 100 = 187.5 × 100 = 225
16 16 16 16
= 125
III 100 10 16 20 24
× 100 × 100 = 200 × 100 = 250 × 100 = 300
8 8 8 8
= 125
Total of 300 400 550 687.5 825
relatives
Index 100 133.33 183.33 229.17 275
number(Av
erage of
relatives)