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Pn. Sanizah's Notes

5/31/2013

1

2

INTRODUCTION

sanizah@tmsk.uitm.edu.my

sanizah@tmsk.uitm.edu.my

**We often hear of index numbers such as: Kuala Lumpur Composite Index
**

EMAS Index Quality Air Index Air Pollution Index Consumer Price Index

CHAPTER 7

INDEX NUMBER

What is index number? • Index number is a statistical tool used to measure changes in average price, quantity, value, air condition and economic health of a country for a stated period of time.

By Sanizah Ahmad

3

sanizah@tmsk.uitm.edu.my

4

TYPES OF INDEX NUMBERS

sanizah@tmsk.uitm.edu.my

ILLUSTRATION

API 0 - 50 51 - 100 101 - 200 201 - 300 301+ Air Pollution Level Good Moderate Unhealthy Very Unhealthy Hazardous

1. Price Index – measures changes in prices of goods and services over time. (i.e. The Consumer Price Index measures the changes in the price of consumer goods)

Note: When CPI , living expenses and cost of living (normally, comparison is based on annual basis)

2. Quantity Index – measures changes in the quantity of goods over time. 3. Quality Index

1

• Base year – the year used to compare its value with the values of the other years ▫ Index number for the base year is always 100. Simple Aggregate Index Weighted Index 1. Weighted Aggregate Index • Weight – value that shows the importance of an item in the index number ▫ the higher the weights. Simple Relative Index 2.my 8 sanizah@tmsk. ▫ The base year should be a normal/stable year and not too far from the year that index is computed.my sanizah@tmsk.uitm.my 1.QMT412 Business Statistics Pn.uitm. Paasche’s index 7 sanizah@tmsk.uitm. Sanizah's Notes 5/31/2013 5 sanizah@tmsk. Laspeyres’ index 3.edu.edu.uitm.my 6 FACTORS IN CONSTRUCTING INDEX NUMBER • Number of items – a group of items or only one item. Simple Average of Relative Index 3. Simple Index Numbers Price index and Quantity Index Unweighted Index 1. the more important the item is. SIMPLE RELATIVE INDEX (SRI) • Ratio of the price of a single commodity in a given period to its price in the base period UNWEIGHTED INDEX • Price relative I pt 100 p0 • Quantity relative I qt 100 q0 2 .edu. 2.edu.

Solution Ex 1 po RM1 .edu.45 respectively.my 10 sanizah@tmsk.edu. 3 .uitm.uitm.QMT412 Business Statistics Pn. 11 sanizah@tmsk.edu.30 The price of petrol in year 2005 has increased by 11. that is an increase of 300%. Sanizah's Notes 5/31/2013 9 sanizah@tmsk.edu.45 Price relative.my EXAMPLE 2 The table below gives the number of water filters sold by a company from 2008 to 2011.30 pt RM1.uitm. the number of water filter sold was 400 percent of the number sold in 2008.30 and RM1. find the price relative index for 2005.54% compared to the base year 2004. Year Number of water filters 2008 400 2009 550 2010 800 2011 1600 Solution Ex 2 qo 400 qt 1600 Quantity relative.uitm.my EXAMPLE 1 Prices of petrol in 2004 and 2005 were RM1. This means that in 2011.my 12 sanizah@tmsk. I p2005 1. I qt 1600 100 100 400 qo 400 Calculate : Quantity relatives (quantity index) of sales for 2011 taking 2008 as the base year. Taking 2004 as the base year.54 p2004 1.45 100 100 111.

Type of Food A B C Quantity sold (kg) 2003 600 1800 1200 2005 650 2200 1400 Item Petrol Diesel Cooking gas 2004 1.QMT412 Business Statistics Pn.70 1.60 1.20 0. taking 2003 as the base year. Sanizah's Notes 5/31/2013 13 sanizah@tmsk. y and z. Simple Average of Relative Index (SARI) • SARI compares the overall changes for a group of commodities or items under consideration • Simple Average of relative price index sanizah@tmsk.uitm.00 1.uitm.00 2006 1.my • The table below shows a country’s prices of petrol.uitm.edu. Example 5 • Calculate the simple average of relative quantity index of three of foods A. 2003=100 Price in 2003(RM) 800 1200 z Price in 2005 (RM) 1000 y 600 Price Relative x 140 120 2.edu. 2006 and 2008.20 2008 1. B and C for 2005 taking 2003 as the base year. Find the values of x.my 14 Example 3 • The table below shows the prices of three types of washing machines A.30 4 .my Example 4 sanizah@tmsk. Compute the simple average of price relative index for year 2008 with 2004 as base year.my I A B C pt 1 100 n p0 qt 1 100 n q0 • Simple Average of relative quantity index I 15 16 sanizah@tmsk.50 1.uitm.edu. B and C in 2003 and 2005 and the price relatives in 2005.35 0.edu. diesel and cooking gas for 2004.

edu.uitm.00 Price 2006 2.edu. we will have to calculate weighted index.QMT412 Business Statistics Pn.uitm.uitm.uitm. WEIGHTED AGGREGATE INDEX sanizah@tmsk.80 5.my EXAMPLE 6 • For the data given below.edu. • A weighted price index I wp wpt 0 Weight 3 5 8 100 Price 2004 1. • Simple aggregate price index I p p t 100 WEIGHTED INDEX 0 • Simple aggregate quantity index I q q t 100 0 19 20 sanizah@tmsk. SIMPLE AGGREGATE INDEX (SAI) • This is an unweighted aggregate index.00 • A weighted quantity index I wq wq t 100 • Calculate weighted aggregate price index for 2006 0 5 .00 3. Sanizah's Notes 5/31/2013 17 sanizah@tmsk.edu.my 18 3.my sanizah@tmsk.my 1. calculate the weighted aggregate price index for 2006 using 2004 as the base year Type of food A B C • When the importance of each item needs to be included.20 6.50 2.

LASPEYRES’ INDEX • Laspeyres’ price index : • Use the base year quantities as the weight I p q p q q p q p t 0 t 0 100 0 0 • Laspeyres’ quantity index : • Use the base year prices as the weight I 0 0 100 23 sanizah@tmsk. The following tables shows the price and quantity required for each material. Type of commodity A B C Weight 3 4 5 Quantity 2003 15 20 50 Quantity 2006 25 30 40 2.uitm. Sanizah's Notes 5/31/2013 21 sanizah@tmsk.edu.my EXAMPLE 7 • For the data given below.00 2006 5.00 8.uitm.00 4.00 2004 4000 2750 2000 1000 2006 3500 3000 3000 2000 0 t A B C D • Pasche’s quantity index • Use the current year prices as the weight I 100 Using 2004 as the base year. calculate a)Laspeyres’ price index for year 2006 b)Paasche’s price index for 2006 6 .00 9.edu.my 24 EXAMPLE 9 sanizah@tmsk.edu.uitm. calculate the weighted aggregate quantity index for 2006 using 2003 as the base year. PAASCHE’S INDEX • Pasche’s price index • Use the current year quantities as the weight Shelly Industry produce electrical components that require four main raw materials.00 6.edu.00 5.00 7.uitm.my 3. Raw Material Price per kg (RM) Quantity (kg) pq I p q q0 pt qt pt t t 100 2004 4.QMT412 Business Statistics Pn.my 22 sanizah@tmsk.

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