Index Numbers

For PGDM Students

By

Prof. Ashutosh Sharma

I.T.S Mohan Nagar, Ghaziabad
 CONTENTS
 Introduction
 Definition
 Characteristics
 Uses
 Problems
 Classification
 Methods
 Value index
numbers
 Chain index
numbers.
 INTRODUCTION

 An index number measures the relative

change in price, quantity, value, or some
other item of interest from one time period
to another.

 A simple index number measures the

relative change in one or more than one
variable.
WHAT IS AN INDEX NUMBER ?
 DEFINITION

 “Index numbers are quantitative

measures of growth of prices, production,
inventory and other quantities of
economic interest.”

­Ronold
 CHARACTERISTICS OF INDEX NUMBERS

 Index numbers are specialised averages.

 Index numbers measure the change in the

level of a phenomenon.

 Index numbers measure the effect of

changes over a period of time.
 USES OF INDEX NUMBERS

o For framing suitable policies.

o They reveal trends and

tendencies.

o Index numbers are very useful in

deflating.
METHODS OF CONSTRUCTING INDEX
NUMBERS
 SIMPLE AGGREGATIVE METHOD

It consists in expressing the aggregate price of all

commodities in the current year as a percentage
of the aggregate price in the base year.

P0  p 10
1
1 p0 0

P01 = Index number of the current
year.
P1 = Total of the current year’s price of all
P commodities.
0
= Total of the base year’s price of all
commodities.
EXAMPLE:­
From the data given below construct the
index number for the year 2016 on the base
year 2015 in Rajasthan state.
PRICE (Rs) PRICE (Rs)
COMMODITIES UNITS 2015 2016
Sugar Quintal 2200 3200

Milk Quintal 18 20

Oil Litre 68 71

Wheat Quintal 900 1000

Clothing Meter 50 60
 Solution:­
PRICE (Rs) PRICE (Rs)
COMMODITIES UNITS 2015 2016
Sugar Quintal 2200 3200
Milk Quintal 18 20
Oil Litre 68 71
Wheat Quintal 900 1000
Clothing Meter 50 60

 p0  3236  p  4351
1

Index Number for 2016-


4351
P01 100  100 
0 134.45
p1  p 3236
It means the prize in 2016 were 34.45% higher than the previous year
2015.
 SIMPLE AVERAGE OF RELATIVES
METHOD.
 The current year price is expressed as a price
relative of the base year price. These price
relatives are then averaged to get the index
number. The average used could be arithmetic
mean, geometric mean or even median.
 p1 100
 
P01    p 0  
N
Where N is Numbers Of items.
EXAMPLE :­
From the data given below construct the
index number for the year 2017 taking 2016
as base year by using Arithmetic mean.
Commodities Price (2016) Price (2017)

P 6 10

Q 12 2

R 4 6

S 10 12

T 8 12
SOLUTION­
Index number using arithmetic
mean­ Price (2007) Price (2008) Price Relative
Commodities
p0 p1 p1
P0
100

P 6 10 166.7
Q 12 2 16.67
R 4 6 150.0

S 10 12 120.0
T 8 12 150.0

 p 100 =603.37

 p 1
 
0

 p1 100
 
p
P01    0  
603.37

5 120.63
N
 WEIGHTED INDEX NUMBERS
 These are those index numbers in which rational weights are
assigned to various chains in an explicit fashion.

Weighted aggregative index numbers­

These index numbers are the simple aggregative
type with the fundamental difference that
weights are assigned to the various items
included in the index.
 Laspeyre's method.
 Paasche‘s method.
 Dorbish and bowley’s
method.
 Fisher’s ideal method.
 Kelly’s
method.
Laspeyre‘s Method-
This method was devised by Laspeyres in 1871. In this
method the weights are determined by quantities in
the base.

p01   pq 1 0
10
0 0 0
 pq
Paasche’s Method-
This method was devised by a German statistician Paasche
in 1874. The weights of current year are used as base year
in constructing the Paasche’s Index number.

p01   pq 1 1
10
0 10
 pq
DORBISH & BOWLEYS METHOD.
This method is a combination of Laspeyre’s and Paasche’s
methods. If we find out the arithmetic average of
Laspeyre’s and Paasche’s index we get the index suggested
by Dorbish & Bowley.

 pq  pq
1 0 1 1

  p
p q
0 0 0
p01 10
2 0
q1
Fisher’s Ideal Index.
Fisher’s deal index number is the geometric mean of the
Laspeyre’s and Paasche’s index numbers.

P01
 pq 1 0


 pq 1 1


 pq  pq
0 0 0 1

100
Kelly’s Method.
Kelly thinks that a ratio of aggregates with selected weights
(not necessarily of base year or current year) gives the base
index number.

p01

 p q 10
1

0

0
p q
q refers to the quantities of the year which is selected as the base.
It may be any year, either base year or current year.
EXAMPLE­
Given below are the price quantity data,with
price quoted in Rs. per kg and production in
qtls.
Find­(1) Laspeyers Index (2) Paasche’s
Index (3)Fisher Ideal Index.
2012 2017
ITEMS PRICE PRODUCTION PRICE PRODUCTION

Salt
15 500 20 600

Potato
18 590 23 640

Tomato
22 450 24 500
 SOLUTION
-­
Price Production Price
pq pq
Product
ion
pq   pq
 p  (q 0 
Items 1 0 0 0 0 1
0 p q
1  1 1 1

Salt 15 500 20 600 10000 7500 12000 9000

Potato 18 590 23 640 13570 10620 14720 11520

Tomato 22 450 24 500 10800 9900 12000 11000

TOTAL 34370 28020 38720 31520

SOLUTION­
1.Laspeyres index:


pq 34370
p01 100  1 0100 
122.66
 p 0q
0
28020
2. Paasche’s Index :

p01   pq 100 
1 1
38720
100 
122.84

0
p 1q 31520
3. Fisher Ideal Index

P01  p q   p q 100 
1 0
1 1 34370

38720
100 

  q
p 0q 0 122.69
p 0 1

28020 31520
WEIGHTED AVERAGE OF PRICE
RELATIVE -
In weighted Average of relative, the price
relatives for the current year are calculated on
the basis of the base year price. These price
relatives are multiplied by the respective
weight of items. These products are added up
and divided by the sum of weights.
Weighted arithmetic mean of price relative­
P01  PV

V
Where- P
P  P01
100
P=Price relative
V=Value weights= p0 q 0
CLASSIFICATION OF INDEX NUMBERS
 VALUE INDEX NUMBERS

Value is the product of price and quantity. A

simple ratio is equal to the value of the
current year divided by the value of base
year. If the ratio is multiplied by 100 we get
the value index number.

V   10
p1q1 pq0 0 0
EXAMPLE­
 From the data given below construct an
index number by chain base method.
Price of a commodity from 2016 to 2018.

YEAR PRICE

2016 50

2017 60

2018 65
SOLUTION­

CHAIN INDEX
LINK
YEAR PRICE (BASE
RELATIVE
2016)

2016 50 100 100

60 120 100
2017 60 100  120  120
50 100

65 108120
2018 65 100  108  129.60
60 100
Good Luck