Chapter 12

Index numbers

Objectives
At the end of this chapter the student should be able to
 understand price indexes
 understand quantity indexes
 apply the theory to examples

12.1 Introduction
The index number is a statistical measure designed to show changes in a variable between two periods,
the current period and the base period. An index number is expressed as a percentage. Mathematically,
current period value
 100
base period value
Index number = (11.1)

The current period is the period for which you find the index number. The base period is the period with
which to compare variable in the current period. The index number of the base period is always 100. If
the index number is more than 100, subtract 100 from the index number. The result is the percent (%)
increase from the base period to the current period. On the other hand, if the index number is less than
100, subtract the index number from 100. The result is the percent (%) decrease from the base period to
the current period.

Example 12.1:
Compare the average hourly wages for journeyman electricians from 2000 to 2010 using 2002 as base year
(see Table 12.1).
Table 12.1: Average hourly wages (2000 to 2010)

Year Average hourly wage

2000 2.00
2002 2.85
2004 3.90
2006 5.25
2008 6.00
2010 8.85

Chapter 12 page 1
Solution:

p1 p
Index number   100  1  100
p0 2.85

where p1 is the current period price value which changes from 2000 to 2010 (see Table 12.2)

Table 12.2: Tabulate results as follows

Year Average hourly Computation of index number Index number (rounded

wage off to four decimals)

2000 2.00  2.00  70.1754

   100
 2.85 
2002 2.85  2.85  100.0000
   100
 2.85 
2004 3.90  3.90  136.8421
   100
 2.85 
2006 5.25  5.25  184.2105
   100
 2.85 
2008 6.00  6.00  210.5263
   100
 2.85 
2010 8.85  8.85  310.5263
   100
 2.85 

Interpretation:
Wage index for 2006 indicates the percentage of 2002 wages earned in 2006, i.e. 184.2105. This indicates

that wages in 2006 increased by approximately 84.2% (184.2105  100  84.2) over base (2002) wage.
Note that an increase in index number from 210.5 in 2008 to approximately 310.5 in 2010 does not mean
that there was a 100% increase in wages from 2008 to 2010. The index number for wages earned in 2010

 p1 8.85 
compared to 2008 is 147.5   100   100  147.5  . This indicates that wages in 2010
 p0 6.00 
increased by 47.5% 147.5  100  47.5 over the wages in 2008 (base year).

Chapter 12 page 2
12.2 Types of index numbers
The two variables often considered in index number analysis are price and quantity. An index can be
computed for either a single item or a basket of related items. We will first calculate the index number of
single item, called single price index and single quantity index. An index number that measures a basket
of related items is called a composite index number. We will calculate the composite price index and
composite quantity index.

Single price index

Single price index measures the percentage change in prices of a single item between any two time periods.
p1
Single price index   100
p0 (11.2)

p0
where = base period price

p1
= current period price

Example 12.2:
(p ) ( p1 )
In 2007, product A cost R0.85 0 and in 2010, product A cost R1.25 . Calculate the single price

index for product A .

Solution:
1.25
  100  147.0588%
Single price index of product A in 2010 (rounded off to four decimals) 0.85

The price of product A in 2010 stands at 147.0588. The price of product A has increased by

approximately 47.0588% 147.0588 100  47.0588 between 2007 and 2010.

Single quantity index

Single quantity index measures the percentage change in quantity of consumption of an individual item
between any two time periods. Price levels are held constant.
q1
Single quantity index   100
q0
(11.3)
q
where 1 = quantity in current period

q0
= quantity in base period

Chapter 12 page 3
Example 12.3:

Share portfolio data. If 350 units of share A were purchased in 2006 and the investor currently holds
300 units in 2010, the change in shareholding level of share A from 2006 to 2010 is given by the single
quantity index.

Solution:
Single quantity index for share A (rounded off to four decimals)
300
  100  85.7143
350
Since the single quantity index is below 100, this shows a reduction in quantity consumption of share. In

2010, approximately 14.2857% 100  85.7143  14.2857 fewer units of share A are held in 2010
than in the base period of 2006.

Composite price index

Average price change for basket of items is measured by composite price index. There are two approaches
to determining composite price index:
1. Laspeyres price index calculates the changes in the aggregate consumption of the base year’s list
of goods when valued at current year prices. In other words, the Laspeyres price method uses the
quantities consumed during the base period in computing the index number i.e.:

 ( p1  q0 )
100
 ( p0  q0 ) (11.4)
Note: The Laspeyres price index is the default approach unless stated otherwise.

2. Paasche price index is similar to that of computing a Laspeyres price index. The difference is that
the Paasche price method uses quantity measures for the current period rather than for the base
period. Thus, if quantities are held constant at current period the Paasche price index is
constructed, i.e.:

 ( p1  q1 )
 100
 ( p0  q1 ) (11.5)

p0
where = base period price
q0
= base period quantity

p1
= current period price

q1
= current period quantity

Chapter 12 page 4
Example 12.4:
In 2006 an investor acquired a small portfolio of shares on the JSE. He has bought and sold from this
portfolio over time. Calculate the Laspeyres and Paasche price indexes (rounded off to four decimals).

Table 12.3: Both his initial 2006 and current 2010 portfolio is given below

Share Base year (2006) Current year (2010)

p0 q0 p1 q1
A
65c 350 115c 300
B
200c 240 120c 60
C
1260c 50 1890c 100

Solution:
Table 12.4: Laspeyres price index

p0  q0 p1  q0

22 750 40 250
48 000 28 800
63 000 94 500

133 750 163 550

Laspeyres price index    p  q   100  163550 100  122.2804

1 0

p  q 
0 0 133750

If quantities are held constant at 2006 (base period) levels, the prices of the portfolio of shares have
increased by, on average, approximately 22.2804% 122.2804  100  22.2804 .

Table 12.5: Paasche price index

p0  q1 p1  q1

19 500 34 500
12 000 7 200
126 000 189 000

157 500 230 700

Chapter 12 page 5
Paasche price index    p  q   100  230700 100  146.4762
1 1

p  q 
0 1 157500

If quantities are held constant at 2010 (current period) levels, the composite price index is 146.4762. This

means that the share prices in the portfolio have increased by, on average, approximately 46.4762%
146.4762  100  46.4762 since 2006.

Composite quantity index

Composite quantity index is similar to computing the composite price index. The difference is that with the
composite quantity index the prices is constant and the change in consumption is measured. The two
approaches to determining composite quantity index:
1. If prices are held constant at the base period the Laspeyres quantity index is:

 ( p0  q1 ) 100

 ( p0  q0 ) (11.6)
Note that the Laspeyres quantity index is the default approach unless stated otherwise.

2. If prices are held constant at the current period the Paasche quantity index is:

 ( p1  q1 )
 100
 ( p1  q0 ) (11.7)

p0
where = base period price
q0
= base period quantity

p1
= current period price

q1
= current period quantity

Chapter 12 page 6
Example 12.5:
Consider Example 12.4. Calculate the Laspeyres quantity index and the Paasche quantity index (rounded
off to four decimals).

Solution:
Table 12.6: Laspeyres quantity index

Share p0  q0 p0  q1

A 22 750 19 500
B 48 000 12 000
C 63 000 126 000

133 750 157 500

Laspeyres quantity index   p 0  q1 

 100 
157500
 100  117.7570
p 0  q0  133750

If prices are held constant at 2006 (base period) levels, the composite quantity index is 117.7570. This

shows that the number of units of shares held have increased, on average, by approximately 17.7570%
117.7570  100  17.7570 from 2006 to 2010.

Table 12.7: Paasche quantity index

Share p1  q0 p1  q1

A 40 250 34 500
B 28 800 7 200
C 94 500 189 000

163 550 230 700

Paasche quantity index    p  q   100  230700 100  141.0578

1 1

p  q 
1 0 163550

If prices are held constant at 2010 (current period) levels, the composite quantity index is 141.0578. This
means that the number of units of shares in the portfolio has shown an average increase of approximately

41.0578% 141.0578 100  41.0578 between 2006 and 2010.

Chapter 12 page 7
 Chapter 12 – Exercises

1. Down Cola Inc. provides a complete line of beer, wine, and cool drink products. Listed below is the
quantity sold and the price for 2008 and 2010 (see Table 12.8).

Table 12.8: Down Cola Inc. products

2008 2010
Item Quantity Sold Price (rands) Quantity Sold Price (rands)
Beer 600 1.00 200 5.00
Wine 3000 10.00 5000 8.00
Cool Drink 10,000 3.00 9000 4.00

a) If quantity is held constant at 2008 levels, calculate the price index of Down Cola Inc.
(rounded off to two decimals).
b) If quantity is held constant at 2010 levels, calculate the price index of Down Cola Inc.
(rounded off to two decimals).
c) If price is held constant at 2008 levels, calculate the quantity index of Down Cola Inc.
(rounded off to two decimals).
d) If price is held constant at 2010 levels, calculate the quantity index of Down Cola Inc.
(rounded off to two decimals).
e) The Paasche Price Index indicates that the price of products have ………. by ……….%.

2. The prices and quantities of three products sold in 2000 and 2010 are given in Table 12.9.

Table 12.9: Sales figures (2000 and 2010)

2000 2010
Product Price Quantity Price Quantity
A 3.50 60 6.50 120
B 5.00 90 8.50 130
C 7.50 110 12.00 160

Calculate the following:

a) The Paasche Quantity Index (using 2000 as base year) (rounded off to two decimals).
b) The Laspeyres Quantity Index (using 2000 as base year) (rounded off to two decimals).
c) The Paasche Price Index (using 2000 as base year) (rounded off to two decimals).
d) The Laspeyres Price Index (using 2000 as base year) (rounded off to two decimals).
e) The Laspeyres Price Index indicates that the price of products ………. by ……….%.
Chapter 12 page 8
3. The sales figures of a certain company were as follows (see Table 12.10).

Table 12.10: Sales figures (2004 and 2009)

Product Price per unit Number of units
2004 2009 2004 2009
A 5.00 12.00 2 500 2 800
B 6.50 14.50 5 000 4 950
C 10.00 16.00 3 500 4 300

Calculate the following:

a) The Laspeyres Price Index (using 2004 as base year) (rounded off to three decimals).
b) The Laspeyres Quantity Index (using 2004 as base year) (rounded off to three decimals).
c) The Paasche Price Index (using 2004 as base year) (rounded off to three decimals).
d) The Paasche Quantity Index (using 2004 as base year) (rounded off to three decimals).
e) The Paasche Quantity Index indicates that the quantities sold showed an ………. by ……….%.

4. The imports of a company were as follows (see Table 12.11).

Table 12.11: Import data

Price per unit (rand) Number of units
Product 1996 2009 1996 2009
I 5.00 12.00 2500 2800
II 6.50 14.50 5000 4950
III 10.00 16.00 3500 4300

Calculate the following:

a) The Laspeyres Price Index (using 1996 as base year) (rounded off to three decimals).
b) The Laspeyres Quantity Index (using 1996 as base year) (rounded off to three decimals).
c) The Paasche Price Index (using 1996 as base year) (rounded off to three decimals).
d) The Paasche Quantity Index (using 1996 as base year) (rounded off to three decimals).
e) The Laspeyres Quantity Index indicates that the imported quantities showed an ………. by …….%.

Chapter 12 page 9
 Chapter 12 - Answers

Exercise 12.1
a) 110.56
b) 99.74
c) 127.39
d) 114.93
e) decreased, 0.26%

Exercise 12.2
a) 153.74
b) 152.86
c) 167.62
d) 166.67
e) increased, 66.67%

Exercise 12.3
a) 198.13
b) 111.47
c) 195.32
d) 109.89
e) increase, 9.89%

Exercise 12.4
a) 198.13
b) 111.47
c) 195.32
d) 109.89
e) increase, 11.47%

Chapter 12 page 10