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Tests of Adequacy of Index Numbers

This document discusses tests that can be used to evaluate the adequacy of index numbers, including the time reversal test, factor reversal test, and circular test. It provides details on how Fisher's ideal price index formula satisfies the time reversal test and factor reversal test by showing the mathematical equations. An example is also given to demonstrate how Fisher's price index is constructed from sample data and how it satisfies the time and factor reversal tests. The summary concludes that Fisher's ideal price index formula meets the criteria for the time reversal test and factor reversal test but not the circular test.

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Siddhant Kapoor
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3K views12 pages

Tests of Adequacy of Index Numbers

This document discusses tests that can be used to evaluate the adequacy of index numbers, including the time reversal test, factor reversal test, and circular test. It provides details on how Fisher's ideal price index formula satisfies the time reversal test and factor reversal test by showing the mathematical equations. An example is also given to demonstrate how Fisher's price index is constructed from sample data and how it satisfies the time and factor reversal tests. The summary concludes that Fisher's ideal price index formula meets the criteria for the time reversal test and factor reversal test but not the circular test.

Uploaded by

Siddhant Kapoor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 12

REVERSIBILITY

TESTS/TESTS OF
ADEQUACY OF
INDEX NUMBERS
Submitted to :
Prof. S.C. Singh

Submitted By :SIDDHANT KAPOOR


Roll No. - 40

Reversibility Tests/
Tests of Adequacy
The following tests have been suggested to
select the adequacy of an index number :
Time reversal test
Factor reversal test
Circular Test

Time Reversal Test


It is used to test whether a given method will work

both backwards and forwards with respect to time.


For example, if P01 is a price index in the current
year 1 with base of preceding year 0 and P 10 is a
price index for the base year 0 based on the
current year 1, then the following relation should
be satisfied:
P01 =
1

P10

or
P01 * P10 = 1
&
Q01 * Q10 = 1

Let us see how Fishers ideal index formula

satisfies the time reversal test.

P01 =

pq
pq

P01 * P10=

pq
pq

pq
pq
1

; P10 =

pq
pq
0

pq
pq

pq * p q * p q
p q pq pq
1

Hence, Fishers ideal index satisfies the test.

=1

Factor Reversal Test


According to Fisher, Just as each formula

should permit the interchange of two items


without giving inconsistent result so it ought to
permit interchanging the prices and quantities
without giving inconsistent result, i.e. the two
results multiplied together should give the true
value ratio.
That is, if p1 and p0 represent the prices and q1
and q0 the quantities in the current and the
base periods respectively, then the price index
for period 1 with base year 0 and the quantity
index for period 1 with base year 0 is given by

pq
pq

P01 * Q01 =

The factor reversal test is satisfied only by the

Fishers ideal price index as shown below:

P01 =

pq
pq

P01 * Q01 =
=

qp
qp
pq

*
*
; Q01 =
q p q p
pq
p q * p q * q p * q p
p q p q q p q p
1

pq
pq
1

q p
q p
1

pq
pq
1

Hence, Fishers ideal index satisfies the test.

Circular Test
This test is concerned with the measurement of

price change over a period of years when the


shifting of base is desirable in a circular fashion.
If Pab is price index for period b with base
period a ; Pbc is the price index for period c
with base period b and Pca is the price index for
period a with base period c, then an index is
said to satisfy the circular test provided
Pab * Pbc * Pca = 1
This test is not satisfied by most of the common
formulae used in the construction of indexes
including the Fishers ideal formula.

Example :Construct Fishers price index using following data


and show how it satisfies the time and factor
reversal tests :
Commodity

2002
Quantity
Price

2003
Quantity
Price

20

12

30

14

13

14

15

20

12

10

20

15

10

Solution :2002

Comm
odity

2003

q0

p0

q1

p1

p1q0

p0q0

q1p1

p0q1

20

12

30

14

280

240

420

360

13

14

15

20

260

182

300

210

12

10

20

15

180

120

300

200

10

32

48

40

60

30

40

30

40

782

630

1090

870

Total

Fishers ideal price index


P01 =

pq
pq
1

pq
pq
1

782 1090
= 1.2471
*
630
870

Time Reversal Test : P01 * P10 = 1


P10 =

pq * pq
=
p
q
p
q

P01 * P10 =

870
630
*
= 0.8019
1090
782

782
1090
870
630
*
*
*
630
870
1090
782= 1

Hence, time reversal test is satisfied.

Factor Reversal Test : P01 * Q01 =


Q01 =

q p
q p
1

q p
q p
1

pq
pq
1

1090
782 1090 870 1090
*
*
*
Thus, P01 * Q01 =
=
630
870
630
782
630
p1 q1

which is the value of


p0q0
Hence, factor reversal test is also satisfied.

THANK YOU

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