Index Numbers
Index Numbers
Index Numbers
Prepared by:
Kaconco James
+256772653191
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Chapter Objectives
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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).
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Types of Index Numbers
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Categories of Simple Index Numbers
– 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
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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
σ భ ொబ ସଽହ
σ బ ொబ ଷଶହ
LPI = = = 150.9
σ ொభ బ ହଶଶହ
σ ொబ బ ଷଶହ
LQI = = = 160.8
σ భ ொభ ଼ ସ
σ బ ொభ
PPI = = ହ ଶ ଶ ହ = 150.0
σ ொభ భ ଼ ସ
σ ொబ భ ସଽହ
PQI = = = 159.8
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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.
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Uses of Index Numbers
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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).
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