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Index Numbers

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51 views14 pages

Index Numbers

Uploaded by

steve phoenix
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Quantitative Methods

Index Numbers

Prepared by:
Kaconco James
+256772653191

1
Chapter Objectives

1. Definition of Index Numbers


2. Uses of Index Numbers
3. Features of Index Numbers
4. Types of Index Numbers.
5. Construction of Index Numbers.
6. Limitations of Index Numbers.

2
Index Numbers - Definition
• An index number is a percentage ratio of
prices, quantities or values comparing two time
periods or geographical locations.
• The time period used as basis for comparison is called the
base period, (letter o or figure 0) is used for differentiation.
• The period compared to the base period is called the new or
current period, (letter n or figure 1) is used instead.
• Because we are dealing with percentages, we
use a standard figure of 100 (for base year).

3
Types of Index Numbers

1. Simple Index numbers


2. Aggregated Simple Index numbers
3. Weighted Index Numbers
 Laspeyre’s indices
 Paasche’s indices
 Fisher’s Ideal indices

5
Categories of Simple Index Numbers

3/21/2010 Malunda Paul 6


Simple Index Numbers - Examples
• Can be based on prices or quantities
– Base year prices or quantities
• Represented by subscript 0 or Old (P0 or Q0)
– Current year prices or quantities
• Represented by subscript 1 or New (Current) (P1 or Q1)
– Name of commodity
௉భ ொభ
P0 P1 ௉బ Q0 Q1 ொబ
Simple Simple
Commodity Base Year Current Year Index Commodity Base Year Current Year Index
A 20 33 165% A 60 80 133%
B 30 40 133% B 45 75 167%
C 15 25 167% C 30 55 183%
D 10 15 150% D 25 55 220%
ସ

෍
– Simple price index is simply the ratio of current period price to base period price
– Simple quantity index is simply the ratio of current period quantity to base period
quantity 7
Categories of Aggregate Simple
Index Numbers

8
Aggregated Simple Index Numbers -
Examples
• Combines various items that are measured differently in the same
basket
• Can be based on prices or quantities
– Base year prices or quantities
– Current year prices or quantities
– Name of commodity
P0 P1 Q0 Q1
Commodity Base Year Current Year Commodity Base Year Current Year
A 20 33 A 60 80
B 30 40 B 45 75
C 15 25 C 30 55
D 10 15 D 25 55
Total 75 113 151% Total 160 265 166%

σ ܲଵ ଵ ଵ ଷ = σ ொభ = ଶ ଺ ହ = 166%
σ ܲ଴ ଻ ହ σ ଵ଺଴
ASPI = ASQI
= = 151% ொబ

– Aggregated simple price index is simply the ratio of summation of all current
period prices to summation of all base period prices
– Aggregated simple quantity index is simply the ratio of summation of all current9
period quantities to summation of all base period quantities
Categories of Weighted Index Numbers -
Laspeyre’s Indices
• The parameters in the base year should be taken as weights
• The equations used are:
 Laspeyre Price Index (LPI); quantities in base year become the weights
 Laspeyre Quantity Index (LQI); prices in base year become the weights

P0 P1 Q0 Q1 P1Q0 P0Q0 Q1P0


Commodity Base Year Current Year Base Year Current Year
A 20 33 60 80 1980 1200 1600
B 30 40 45 75 1800 1350 2250
C 15 25 30 55 750 450 825
D 10 15 25 55 375 250 550
Total 4905 3250 5225

σ ௉ భ ொబ ସଽ଴ହ
σ ௉ బ ொబ ଷଶହ଴
LPI = = = 150.9

σ ொభ ௉ బ ହଶଶହ
σ ொబ ௉ బ ଷଶହ଴
LQI = = = 160.8

• Base year weights become out of date as the pattern of demand 10


and price changes
Categories of Weighted Index Numbers -
Paasche’s Indices
• The parameters in the current year should be taken as weights
• The equations used are:
• Paasche Price Index (PPI)
• Paasche Quantity Index (PQI)
P0 P1 Q0 Q1 P1Q1 P0Q1 Q0P1
Commodity Base Year Current Year Base Year Current Year
A 20 33 60 80 2640 1600 1980
B 30 40 45 75 3000 2250 1800
C 15 25 30 55 1375 825 750
D 10 15 25 55 825 550 375
Total 7840 5225 4905

σ ௉ భ ொభ ଻଼ ସ ଴
σ ௉ బ ொభ
PPI = = ହ ଶ ଶ ହ = 150.0

σ ொభ ௉ భ ଻଼ ସ ଴
σ ொబ ௉ భ ସଽ଴ହ
PQI = = = 159.8

• Additional survey and calculation work is required each time the


index is to be worked out (Chain Index) 12
Categories of Weighted Index Numbers -
Fisher’s Ideal Indices
• Determines the geometric mean of both
Laspeyre and Paasche indices
– Fisher’s Price Index = FPI =
– Fisher’s Quantity Index = FQI =

14
Uses of Index Numbers
1. Help in measuring relative changes in a set of items.
2. Provide a good basis of comparison; because they are
expressed in abstract unit distinct from the unit of
element.
3. Help in formulating suitable policies for business and
economic activities.
4. Help in identifying general trend of the phenomenon.
5. Are used in deflating original data (they are used to
adjust the original data for price changes or to adjust
wages for cost of living changes).
6. Can be used for forecasting future events.

15
Uses of Index Numbers

7. Helpful in evaluating and comparing purchasing


power of money.
8. Used to throw light on the economic progress made
by various countries.
9. Index numbers prepared on anyone base period can
be adjusted with reference to any other base period.
10. Index numbers (by using percentages and averages)
smoothen the fluctuations in the data for decision
making (draw conclusions).

16
Index Number Challenges or
Limitations
1. Index numbers are only approximations.
2. Tastes and consumption change over time.
3. Base period should be normal.
4. Date used to compute index numbers might be outdated.
5. Index numbers are averages; thus will have advantages and
disadvantages of an average.
6. There is no all-purpose index.
7. Selection of the Items (items must be representative of the topic
covered by the index).
8. Selection of Price Quotations (sample surveys on price and
quantities).

17

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