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# PAPER NO-xxiii REPORT OR PROJECT ON

**QUANTITY AND PRICE INDEX NUMBERS IN NATIONAL ACCOUNT
**

SUBMITTED TO SUBMITTED BY DR. POONAM SETHI DEEPAK ROLL NO _____________ B.COM (H) 3rd YEAR

HINDU COLLEGE DELHI UNIVERSITY

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CERTIFICATE

It is certified that the Project Report entitled “Quantity and Price Index Number in National Account” submitted by DEEPAK with Roll No. ________________ is his own work and has been carried out under my supervision.

Mentor Dr. POONAM SETHI (Commerce Department) (Hindu College, Delhi University)

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Also. B. POONAM SETHI for the valuable guidance and advice. It gave us an opportunity to participate and learn about the management system of the companies and increase ours knowledge about the concern subject. I would like to thank our Commerce Department for providing us with a good environment and facilities to complete this project. an honourable mention goes to my families and friends for their understandings and supports on us in completing this project. She inspired us greatly to work in this project.Com (H). Her willingness to motivate us contributed tremendously to our project. we would like to take this opportunity to thank to the Hindu College of Delhi University for offering this subject. Without helps of the particular that mentioned above.ACKNOWLEDGEMENTS First and foremost. we would face many difficulties while doing this project. DEEPAK ii | P a g e . Words are inadequate in offering my thanks to the Project Trainees and Lab Assistant for their encouragement and cooperation in carrying out the project work. I would like to thank to my mentor of this project Dr. Finally. Besides. I also would like to thanks for her timely guidance in the conduct of our project work which help me to complete this project work on time.

..iii 1. CONCLUSION…………………………………………………………………………......3 Problems in the construction of index ……………………………………………....4 2.................24 6.....12 Origin and history…………………………………………………………………........6 Un-weighted index number................18 SENSEX Calculation Methodology………………………………………………19 Maintenance of SENSEX …………………………………………………………19 Adjustment for Bonus..Scrip Selection Criteria……………………………………………….....13 Revised Series of IIP with Base Year 1993-94 …………………………………14 4...... BIBLIOGRAPHY………………………………………………………………………..i Acknowledgment ……………………………………………………………………………ii Table of Contents …………………………………………………………………………..20 Free Float Methodology …………………………………………………………....11 3......1 Important definition ………………………………………………………………….......22 5...... SHARE PRICE INDICES Bombay Stock Exchange …………………………………………………………17 SENSEX ........TABLE OF CONTENTS CONTENTS PAGE NO Certificate ……………………………………………………………………………………... INDEX NUMBER OF INDUSTRIAL PRODUCTION Meaning …………………………………………………………………………….....21 Total Return Index (Nifty)…………………………………………………………................................... Rights and Newly Issued Capital …………………….......8 Quantity and volume index numbers ……………………………………………....................2 Daily use of index numbers ………………………………………………………........ METHOD OF CONSTRUCTING INDEX NUMBERS Price index number... INTRODUCTION History of index number …………………………………………………………….........6 Weighted index number……………………………………………………………...13 Successive Revisions…………………………………………………………….......25 iii | P a g e .....

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Vaughan reasoned that the market for basic labour did not fluctuate much with time and that a basic labourer’s salary would probably buy the same amount of goods in different time periods. [1] While Vaughan can be considered a forerunner of price index research. had collected a large amount of price data going back hundreds of years. so that a labourer’s salary acted as a basket of goods.1 History of Index Number No clear consensus has emerged on who created the first price index. Fleetwood. Vaughan's analysis indicated that price levels in England had raised six to eightfold over the preceding century.CHAPTER-1 INTRODUCTION 1. his analysis did not actually involve calculating an index. Fleetwood proposed an index consisting of averaged price relatives and used his methods to show that the value of five pounds had changed greatly over the course of 260 years. The earliest reported research in this area came from Welshman Rice Vaughan who examined price level change in his 1675 book A Discourse of Coin and Coinage. Vaughan wanted to separate the inflationary impact of the influx of precious metals brought by Spain from the New World from the effect due to currency debasement. 1 |Page . These statutes set wages for certain tasks and provided a good record of the change in wage levels. An Oxford student asked Fleetwood to help show how prices had changed. Vaughan compared labour statutes from his own time to similar statutes dating back to Edward III. who already had an interest in price change. In 1707 Englishman William Fleetwood created perhaps the first true price index. He argued on behalf of the Oxford students and published his findings anonymously in a volume entitled CHRONICON PRECIOSUM. The student stood to lose his fellowship since a fifteenth century stipulation barred students with annual incomes over five pounds from receiving a fellowship.

different industries. an index number is the ratio of two index number expressed as a per cent. where one of the figure is used as a base” ………MORRIS HAMBURG 4.. or with respect of geographic location. An index number is a statistical measures designed to show changes in the variables or in a group of related variables over time.1.” ……... profession. “Index numbers are devices for measuring differences in magnitude of a group of related variables. etc. or a “relative” which express the relationship between two figures. different cites or different countries. Thus when we say that the index number of wholesale prices is 112 for July 2010 it means there is net increase in the price of wholesale commodities to the extent of 12 per cent during the year. CROXTON & COWDEN 3.2 Important Definition Some of important definitions of index number are given below: 1. “In its simplest form. or other characteristics. However it should be noted that index number not only measures changes over the period of time but it also compare economic conditions of different locations.” …….” ………PATTERSON From above definitions it is clear that an index number is a specialized average designed to measures the change in a group of relative variables over a period of time. an index number is nothing more than a relative number. geographical location or other characteristics such as income. “An index number is a statistical measures designed to show change in a variable or group of variable with respect to time. 2 |Page . “In its simplest form.SPIEGEL 2.

Newspaper headline the fact that price are going up or down . i. very often its lead to strikes and lock-outs which in turns cause considerable wastes of resources. For example. Index numbers are highly useful in deflating they are used to adjust the original data for price change. while deciding the increase in dearness allowance of the employees. if one wants to get an idea as to what is happening in an economy he should look to important indices like the index number of industrial production. they are described as barometer of economic activities. If wages and salaries are not adjusted in accordance with the cost living. or to adjust wages for cost of living changes and thus transforms nominal wages into real 3 |Page . agriculture production. 2. that industrial production rising or falling . i. In fact.. They are used to pulse of economy and they have come to be used as indicator of inflationary or deflationary tendencies. etc. the employers have to depend upon the cost of living index.. They help in framing suitable policies. For example.3 Daily Use of Index Numbers Index numbers have become one of the most widely used statistical devices and there is hardly any field where they are not used. Many of the economic and business polices are guided by index numbers.1. they are rising year after year. Their uses can be show by the following points: 1. Since index numbers are most widely used for measuring changes over a period of time series so formed enable us to study general trend of the phenomenon under study. business activities.e. that imports are increasing or decreasing . by examining index numbers of import for India for last 10 years we can say our import are showing upward tendency. Index numbers are indispensable tool of economic activities and business analysis. They reveal trend and tendencies.that crime are rising in a particular period compared to the previous period as disclosed by index numbers. 3.e. Index numbers are useful in deflating .

nominal income can be transforms into real income and nominal sales into real sales through appropriate index numbers. Moreover. 4 |Page .wages.

Since index numbers index are specialized averages a decision has to made as to which particular (i.. After the commodity has been selected. a month or a day. 4. There is no all-purpose index. The index for base period is always taken as 100. 2. Price of many commodities varies from place to place and even from shop to shop in the same market.e. It may be a year. Every item cannot be included while constructing index it is necessary to decide what commodity to include. a price index that is intended to measures the cost or living of poor families. The items included in index should be determined by the purpose for which the index is constructed. median.4 Problems in the Construction of Index Numbers: Before constructing index numbers a careful thought must be given to the following problems: 1. 5. geometric mean or harmonic 5 |Page . Choice of average. Thus. Selection of number of items. the next problem is to obtain price quotation for these commodities. mode.1. Whenever index numbers are constructed a reference is made to some base period. The base period of an index number is the period against which comparison is made. The purpose of Index. great care should be taken out to include goods ordinarily used by middle class and upper class groups. Price quotations. The purpose of constructing the index number must be very clearly decided. Though the selection of the base period would primarily depends upon the object of index. Selection of base period. mean. A selection must be made of representative places and person. Failure to deicide clearly the purpose of the index would lead to confusion and wastage of time with no fruitful result. 3. Every index is of limited and particular use.

mean) should be used for constructing the index. Selection of appropriate formula. a choice has to be made between arithmetic mean and geometric mean. The problem very often is that of selecting the most appropriate formula. All the items are not of equal importance and hence it is necessary to used suitable method whereby the varying importance of the different items be taken into account. The problem of selecting weights is quite important and at same time difficult to decide. 7. The choice of the formula would depend not only on the purpose of the index but also on data available. Basically. 6. Selection of appropriate weights. The term “weight” refers to the relative importance of the different items in construction of the index. mode and mean are almost never used in the construction of index. Median. 6 |Page . A large number of formulae have been available for constructing the index.

The chart shows the various methods: 2.2 Un-Weighted Index Numbers I. Simple Aggregative. 7 |Page . This is the simplest method of constructing index. In the un-weighted indices weights are not expressly assigned whereas in the weighted indices weights are assigned to various items.CHAPTER-2 METHODS OF CONSTRUCTING INDEX NUMBER 2. Weighted Indices. Simple average of relatives. Un. Simple aggregative. and ii.Weighted Indices. When this method is used to construct a price index the total of current year prices for the various commodities in question is divided by the total of base year prices and the quotient is multiplied by 100.1 Price index number A large number of formulae are devised for constructing index numbers. and b. They are grouped under two heads: a. Symbolically: = total of current year prices for various commodities. Each of these types may be further divided under two heads: i.

Moreover. When geometric mean is used for averaging the price relatives the formula for the index becomes Or where 8 |Page .= total of base year prices for various commodities. II. Manipulations are thus possible to suit one’s requirements by quoting prices per kg rather than per pound rather than per quintal. price relatives are generally averaged either by the arithmetic or the geometric mean. and so on. 2. It is for these reasons that simple aggregative index has never gained any great degree of acceptance. This index is based on the assumption that is based on that the various items and their prices are quoted in the same unit. first of all price relatives are obtain from the various items included in the index and then average of these relatives is obtained using any one of the measure of central value. When this method is used to construct a price index. If the unit of measurement is different for different items. Limitations of this index: There are two main limitations of the simple aggregative index: 1. No consideration is given to the relative important of the commodities. Although any measures of central value can be used to obtain the overall index. The unit used in the price or quantity quotation can exert a big influence on the value of the index. Simple Average of Relatives. When arithmetic mean is used for averaging the relatives the formula for computing the index is Where N refers to the number of items whose price relatives are thus averaged. Any index whose value can be manipulated in this 8/manner can hardly be used as an objective measure. the index shall producer vastly divergent result. equal importance is given to all the items which are wrong.

There are various methods of assigning weights and consequently a large number of formulae for constructing index have been devised of which some of most important methods are: 1.Other measures of central value are not in common use for averaging relatives. Weighted Aggregative Indices: These indices are of the simple aggregative type with the fundamental difference that weights are assigned to the various items included in the index. LASPEYRES Method: The LASPEYRES price index is a weighted price index. PAASCHE’S Method: The PAASCHE price index is a weighted aggregate price index in which the weights are determined by the quantity in the given year. The formula for constructing the index is: 9 |Page . The formula for constructing the index is: LASPEYRES index attempts to answer the question: “what is the change in aggregate value of the base period list of the goods when the valued at given period of prices?” This index is widely used in practical work. I. 2. Construction of index requires a conscious effort to assign to each commodity weight in accordance its importance in the total phenomenon that the index is supposed to describe.3 Weighted index numbers The so-called un-weighted index discussed is not un-weighted in the true sense of the term. 2. weights being implicit rather than explicit. They assign equal importance to all the items included in the index and as such they are in reality weighted. where the weights are determined by quantity in the base period.

DORBISH and BOWELY Method: DORBISH and BOWELY have suggested simple arithmetic mean of the two index that is LASPEYRES and PASSCHE so as to take into account the influence of both the periods. Irving Fisher has given a number of formulae for constructing index and of these he calls one as the ‘ideal’ index.e. current as well as base period. P = PASSCHE index Or 4.. The formula for constructing the index is: 10 | P a g e . this formula answers the question: “what would be the value of the given period list of goods when valued at base period prices?” 3. The formula for constructing the index is: Where L = LASPEYRES index. MARSHALL-EDGEWORTH Method: In this method also the current year as well as base year prices and quantities are considered. i.In general. The Fisher’s Ideal index is given by the formula: It shall clear from the formula that fisher’s Ideal index is a geometric mean of the LASPEYRES and PASSCHE indices. Thus in the Fisher’s Method we average geometrically formulae that err in opposite directions. FISHER’S ‘ideal’ index: Prof. 5.

not necessarily the base year or the current year. The steps in the construction of the weighted arithmetic mean of the relative’s index number are as follows: i. Express each items of the period for which the index is being calculated as per cent age of the same items in the base period.Or opening the brackets It is simple. Thus the average quantity of two years may be used as a weights. KELLY’S Method: Truman L. like un-weighted relative method it is also possible to compute weighted average of relatives. the average of the quantities of three or more year can be used as weights this method is known as fixed weight aggregative index and in currently in great favour in the construction of index series. 11 | P a g e . II. the formula becomes: Similarly. giving a very close approximately to the results obtained by the ideal formula. Weighted Average of Relatives: In this methods discussed above price relatives were not computed. readily constructed measures. For purpose of averaging we may use either the arithmetic mean or the geometric mean. 6. Kelly has suggested the following formula for constructing the index: Here weights are the quantities which may refers to some period. However.

4 QUANTITY AND VOLUME INDEX NUMBERS Price index numbers measures and permit comparison of the price of certain goods. Multiply the percentage as obtained in step (i) for each item by the weight which has been assigned to that item. Thus. Divide the sum obtained in step (iii) by the sum of the weights used. In constructing of quantity index number. 2. construction or employment. The result is the index number. This is weighted geometric mean of relative’s index numbers. when LASPEYRES method is used 12 | P a g e . production indices are highly significant as indicator of the level of output in the economy or in any part of it. iii. quantity index number. We measure the quantity. When geometric mean is used the formula for computing the index is: And V = value weights. measure the physical volume of production. Instead of using arithmetic mean the geometric mean may be used for averaging relatives. and when we weigh we used price or value as weights. i.ii. Though price indices are more widely used. Quantity indices can be obtained easily by changing p to q and q to p in the various formula discussed in price index. Symbolically. V = Value Weights. Add the result obtained from the several multiplications carried out in step (ii). i. On the other hand. the problems confronting the statistician are analogous to those involved in the price indices. iv.e.e.

However. any other suitable weights can be used instead.When PAASCHE’S formula is used When FISHER’S formula is used These formulae represent the quantity index in which the quantities of the different commodities are weighted by their price. 13 | P a g e .

Metallurgical industries – iron and steel. cement. etc. 6. Industries subject to excise duties – sugar. coal. aeroplanes. etc. etc. Mining industries – iron ore. Manufacturing & General. 5. petroleum. etc. silk. 2.CHAPTER-3 INDEX NUMBER OF INDUSTRIAL PRODUCTION The index number of industrial production is designed to measures increase or decrease in the level of industrial production in a given period compared to some base period. match. copper. In case of India the base year has been fixed at 1993-94 hence the same would be equivalent to 100 Points Index of Industrial Production (IIP) is an abstract number. E. Indian IIP will focus on sectors like mining. chemical. soap. Miscellaneous – glass. For constructing such index it is necessary to obtain data about the level of industrial output in the base period and in given period. Usually data about production are collected under the following heads: 1. 3. 4. the magnitude of which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time It is a statistical device which enables us 14 | P a g e .1 Meaning Index of Industrial Production (IIP) in simplest terms is an index which details out the growth of various sectors in an economy. electricity. Mechanical industries – locomotive. woollen. ships. etc. Also base year needs to be decided on the basis of which all the index figures would be arrived at. 3.g. It should be noted that such an index measures change in the quantum of production and not in values. tobacco. Textile industries – cotton.

1960. the present general index of industrial production compiled in India has in its scope mining. When the index was commenced in India. 3. manufacturing. 1980-81 and 1993-94. Ministry of Commerce and Industry made the first maiden attempt of compilation and release of Index of Industrial Production with base year 1937 covering 15 important industries accounting for more than 90% of the total production of the selected industries. 1956.3 Successive Revisions 15 | P a g e . The general scope of the index of industrial production as recommended by the United Nations Statistical Office (UNSO) is defined to include mining. 1951. As the structure of industrial sector changes over time. The Office of Economic Advisor. the responsibility for compilation and publication of the Index of Industrial Production (IIP) was vested with this office. Strictly speaking the IIP is a short term indicator measuring industrial growth till the actual result of detailed industrial surveys become available. But due to constraints of the data availability. 3. Subsequently.2 Origin and History In India. the base years were revised twice. 1970. manufacturing and electricity only. This indicator is of paramount importance and is being used by various organisations including Ministries/Departments of Government of India.. Research Institutes and Academicians. so as to measure the real growth in the industrial sector.to arrive at a single representative figure to measure the general level of industrial activity in the economy. the base year adopted was 1937 and this was revised successively to 1946. Industrial Associations. in 1946 and 1951. the first official attempt to compute regularly the Index of Industrial Production was made much earlier than even the recommendations on the subject at the international level by UNSO. by reviewing the coverage of items and industries and by improving as far as practicable. UNSO recommends that the base year of the IIP may be revised quinquennially. It has been revised from time to time by shifting the comparison base to a recent period. construction. electricity and gas sectors. the technique of construction with a view to reflect adequately the industrial growth and structure. it becomes necessary to revise the IIP periodically. viz.With the inception of Central Statistical Organisation (CSO) in 1951.

1960. Another important feature of the latest series is the inclusion of unorganised manufacturing sector (That is. 1956.4 Revised Series of IIP with Base Year 1993-94: Technical Advisory Committee The Technical Advisory Committee (TAC) which had been set up in the Department of Statistics in June. 1995 to advise on Compilation of Comparable State IIPs and Composite all-India IIP was also entrusted subsequently in November 1996 with the responsibility of examining all the issues and providing technical guidance in the matter of shifting the base year of all-India IIP to 1993-94. The revised series has followed the National Industrial Classification NIC-1987. The latest series with 1993-94 as the base year containing 543 items (with the addition of 3 items for mining sector and 188 for the manufacturing sector) has come into existence on 27 May 1998 and ever since. the same 18 SSI products) along with organised sector for the first time in the weighting diagram. 3. The scope of the index was restricted to mining and manufacturing sectors consisting of 20 industries with 35 items. 1980–81 and 1993-94. The salient features of the recommendations of the TAC in this regard are as under:- 16 | P a g e . Initially it was covering 15 industries comprising three broad categories: mining. it became necessary to revise the base year of the IIP periodically to capture the changing composition of industrial production and emergence of new products and services so as to measure the real growth of industrial sector (UNSO recommends quinquennial revision of the base year of IIP). 1970. with a time lag of six weeks from the reference month. the successive revised base years were 1946. After 1937. the source agencies proposed clubbing of 478 items of the manufacturing sector into 285 item groups and thus making a total of 287 item groups together with one each of electricity and mining & quarrying. These quick estimates for a given month are revised twice in the subsequent months. manufacturing and electricity.As the structure of the industrial sector changes over time. the quick estimates of IIP are being released as per the norms set out for the IMF’s SDDS2. 1951. To retain the distinctive character and enable the collection of data.

Gross Value of Output (GVO) rather than Gross Value Added (GVA) may be used for weighting purposes from sectorial (1-digit) to the ultimate (4-digit) levels of industry for compilation of both the State IIPs as well as all-India IIP. the use of GVO as weights at industry group levels was not accepted for Compiling the All India IIP and GVA was continued to be used as in the 1980-81 series. the selection of items may be based only on the detailed results of ASI 1993-94. if necessary. as has also been the practice in the past. The revised series would follow the National Industrial Classification (NIC) 1987. the weighting diagram of the revised series should take into account the total production of both the organised and unorganised manufacturing sectors. c. The criteria may be relaxed.a.e. d. Most of the recommendations of the TAC were accepted.. Recognising the contribution of the unorganised sector. For example. The over-riding criteria for finalisation of item basket would be the regular flow of monthly production data from the source agencies. the selected items should account for nearly 80% of the total output for the manufacturing sector. At least 18 items of small scale sector included in the present series may be considered for inclusion in the new series. However. The current series of all-India IIP may be revised by shifting its base to 199394. b. f. items not accounting for a gross annual production of 80 crore may not necessarily be included in the basket. e. The item basket for the revised series of all-India IIP with base 1993-94 may be selected in a similar manner as recommended for selection of State level item basket i. to ensure that the provisionally selected items in all the 2-digit industry groups captured at least 60% of the Value of Output of the particular group. However the criteria may be used with certain flexibility. Scope and coverage: 17 | P a g e . In view of the difficulties in lining up item-wise monthly production data for small scale items.

Mfg.1) 18 | P a g e .285. .The scope of the index has been confined to mining. Electricity . manufacturing and electricity sectors and does not cover gas. of Items Sector Mining Manufacturing Electricity Total 1980-81 61 288 1 350 1993-94 64 478 1 543* *(clubbed into 287 item groups: Mining-1. The distribution of items covered by the index with 1980-81 and 1993-94 base years are as follows:No. water supply and construction.

This stock exchange played a significant role during the phase of recovery from several years of depression. The objectives of index are: 19 | P a g e . Popularly known as SENSEX. BSE SENSEX Bombay Stock Exchange (BSE) SENSEX is the most widely used and accepted equity price Index in the country. it comprise of 30 scrip representative a sample of large. the index has been serving a large measure.CHAPTER-4 SHARE PRICE INDICES 4. name as Native Share and Stock Broker Association. well-established and financially sound companies. six public representatives and an Executive director & Chief Executive Officer and a Chief Operative Officer. The Sensex is supposed to mirror the happening on the BSE. It was the first to be recognised by the government of India. This stock exchange is now properly known as the Bombay Stock Exchange (BSE). three SEBI nominees. Its formed deed of association was executed in 1875. with the base year as 1978-79. so will you check out the Sensex to get a sense of what is happening in the stock market? Being the oldest index in India it has also attains a position of pre-eminence in the mind of Indian investors. the purpose of quantifying the price movement as also the sensitivity of the market in an effective manner. who are the broking community.1 BOMBAY STOCK EXCHANGE (BSE) The first organised stock exchange was established in July 1875 as an association of native brokers. Just as you check only couple of mangoes in a basket to decide whether is the entire lot is good. The Governing Board having 20 directors is the apex body. The Governing Board consists of 9 elected directors. which decides polices and the affairs of the exchange.

2.2 SENSEX . Listed History: The scrip should have a listing history of at least 3 months at BSE.1. money managers and small investors all refer to the BSE Sensex for their specific purpose. Market Capitalization Weightage: The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0. Exceptions can be made for extreme reasons like scrip suspension etc. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. Benchmark of funds’ performance: The inclusion of blue chip and the wide and balanced industries representation in the Sensex makes it the ideal benchmark for fund managers to compare the performance of their funds.e. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost. 4.5% of the Index.feature was launched on BSE Sensex. Industrial investors. Sensex is widely used to describe the mood of Indian market. 4. In case. Final Rank: The scrip should figure in the top 100 companies listed by final rank. minimum listing history would not be required. no other Index matches the BSE Sensex in reflecting market movement and sentiments. a company is listed on account of merger/ demerger/ amalgamation. 20 | P a g e . 2.. 3.Scrip Selection Criteria The general guidelines for selection of constituents in SENSEX are as follows: 1. index. The country’s first derivative product. To measure market movement: Giving its long history and wide acceptance. Trading Frequency: The scrip should have been traded on each and every trading day in the last three months at BSE. The BSE Sensex is in effect the proxy for the Indian stock markets. i.

SENSEX is being calculated on a free-float market capitalization methodology. Index Closure Algorithm The closing SENSEX on any trading day is computed taking the weighted average of all the trades on SENSEX constituents in the last 30 minutes of trading session. If a SENSEX constituent has not traded at all in a day. 4. then its last day's closing price is taken for computation of Index closure. do not destroy the historical value of the index. 21 | P a g e . well-established and financially sound companies across key sectors. first compiled in 1986. the last traded price is taken for computation of the Index closure. The "free-float market capitalization-weighted" methodology is a widely followed index construction methodology on which majority of global equity indices are based. If a SENSEX constituent has not traded in the last 30 minutes.5. The base year value adjustment ensures that replacement of stocks in Index. 2003. STOXX. The base year of SENSEX was taken as 1978-79. Since September 1. was calculated on a "Market CapitalizationWeighted" methodology of 30 component stocks representing large. 6. all major index providers like MSCI. Track Record: In the opinion of the BSE Index Committee. The use of Index Closure Algorithm prevents any intentional manipulation of the closing index value. SENSEX today is widely reported in both domestic and international markets through print as well as electronic media.4 Maintenance of SENSEX One of the important aspects of maintaining continuity with the past is to update the base year average. the company should have an acceptable track record. additional issue of capital and other corporate announcements like 'rights issue' etc. S&P and Dow Jones use the free-float methodology. 4. FTSE. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se affect the index values. It is scientifically designed and is based on globally accepted construction and review methodology.3 SENSEX Calculation Methodology SENSEX. Industry/Sector Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

The BSE Index Cell does the day-to-day maintenance of the index within the broad index policy framework set by the BSE Index Committee. issues bonus shares.5 Adjustment for Bonus. • Adjustments for Bonus Issue When a company. there is no change in the Base Market capitalization. An offsetting or proportionate adjustment is then made to the Base Market capitalization (see 'Base Market capitalization Adjustment' below). the base value is adjusted. included in the compilation of the index. • Rights Issues When a company. fund managers. a discontinuity would arise between the current value of the index and its previous value despite the non-occurrence of any economic activity of substance. which is used to alter market capitalization of the component stocks to arrive at the SENSEX value. market participants and members of the BSE Governing Board. only the 'number of shares' in the formula is updated. The BSE Index Cell keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all BSE Indices. • Other Issues Adjustments for 22 | P a g e . Therefore. included in the compilation of the index. the market capitalization of that company does not undergo any change. The BSE Index Cell ensures that SENSEX and all the other BSE indices maintain their benchmark properties by striking a delicate balance between frequent replacements in index and maintaining its historical continuity. At the BSE Index Cell. the free-float market capitalization of that company is increased by the number of additional shares issued based on the theoretical (ex-right) price. 4. Rights and Newly Issued Capital SENSEX calculation needs to be adjusted for issue of Bonus or Rights shares if no adjustments were made. The BSE Index Committee comprises of capital market expert. issues right shares.

Rs. The "New Base Market capitalization” will then be: This figure of Rs. the Sensex was calculated based on full market capitalisation methodology. spin-offs etc.2450 crores and the aggregate market capitalization of all the shares included in the index before the right issue is made is. the country’s equity benchmark Sensex is being calculated based on the Free Float methodology. 4. STOXX and other index providers are also using the free-float methodology. FTSE. mergers. all the major index providers have shifted to the Free Float methodology. which is followed by FIIS to track Indian equities. Prior to 1-9-2003.100 crores. Internationally.24 crore will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change becomes necessary. NASDAQ-100. or when equity is reduced by way of buy-back of shares. 23 | P a g e . is also based on the free-float methodology. The existing Base Market capitalization (Old Base Market capitalization). suppose a company issues right shares which increases the market capitalization of the shares of that company by say. say. • Base Market capitalization Adjustment The formula for adjusting the Base Market capitalization is as follows: To illustrate. corporate restructuring etc. shifted all its indices to the Free-float methodology. say Rs. S&P. MSCI. Dow Jones.Base Market capitalization adjustment is required when new shares are issued by way of conversion of debentures. the underlying index to the famous ETF-QQQ is based on Free-float methodology. a leading global Index provider. The MSCI Indian Standard Index.6 Free Float -----A Globally Accepted Indexing Methodology From 1ST September 2003. is Rs. 2501. in 2002.4781 crore.

BSE and the Determination of the Free-float Factor BSE has designed the detailed Free-float format to be filled and summited by all index companies on a quarterly basis with the exchange. it is rounded-off to the higher multiple of 10 the free-float factor of the company is categorised into one of the bands given in diagram. a benchmark for the banking sector stock also based on the Free-float methodology. Free-float factor is the multiple with which total market capitalisation of a company is adjusted to arrive at the free-float market capitalisation. BSE launched BANKEX. is called the total return index Total return index reflects the return on the index arising from constituent stock movement and dividend receipts from constituent index stocks. On 16TH June 2003. However. 4. was the country’s first Free-float index. The banding structure reduces the potential frequent changes in the Free-float factor of index companies. A Free-float factor of say 0. the dividend received from the constituent stock also need to be factored in the index values. a price index does not consider the return arising from dividend receipt.7 Total Return Index (Nifty) Nifty is the price index and hence reflects the returns one would earn if investment is made the index portfolio. Methodology for Total Return Index (TR) is as follows: 24 | P a g e . Once the free-float factor of accompany is calculated. The exchange determines the free-float factor for each company based on the detailed information submitted by the companies. launched in July 2001. to get a true picture of return. Such an index. which includes the dividends received.Free-float Indices in India Currently there are two indices based on Free-float methodology. Therefore.6 means that only 60% of market capitalisation of the company will be considered for Index calculation. Only capital gains arising due to price movements or constituent stocks indicated in price index. BSE TECK Index.

The following information is as prerequisite for calculation of TR Index: (1) Price Index close. (4) Index Base Capitalisation on ex-dividend date. Base for both the Price index close and TR Index close will be the same. 25 | P a g e . Indexed dividends are then reinvested in the index to the given TR Index. An investor in index stock should benchmark his investment against the Total Return Index instead of the price index to determine the actual return on the index. (3) Dividend pay-out in Rupees. (2) Price Index return. Dividend pay-outs as they occur are indexed on ex-date.

An index time series is a list of index numbers for two or more time period of time. For example.5%. but if wheat production is twice as important as cotton. 26 | P a g e . Index numbers are studied for making forecasts or inferences about the figure are applied in the term of index numbers. one of which is the base time period. if wheat production is gone up to 110% of the previous year’s production and cotton production has gone up to 105%. Relatives are derived because absolute numbers measured in some appropriate unit. This assumes that both have equal weights. it is possible to average the two percentages as they have gone up by 107. An index number is a ratio or an average of ratios expressed as a percentage. The simple index is computed for one variable whereas the composite is calculated from two or more variables. The average relatives obtained through this process are called index numbers. These are of two broad types: simple and composite. If the meaning of the relative figure remains ambiguous. The basic device used in all method of index number construction is to be average the relative change in either quantities or prices since relatives are comparable and can be added even though the data from which they were derived cannot themselves be added. Just as the arithmetic mean is used to represent a set of values. either the independent or dependent variable or both may be in the form of index numbers. are often of little importance and meaningless in themselves. percentage should be weighted 2 and 1. where each index number employs the same base year. an index number is used to represent a set of values over two or more different period or locations.CONCLUSION Index numbers are convenient devises for measuring relative changes of differences from time to time or from place to place. it is necessary to know the absolute as well as the relative number. Most of index numbers are composite in nature. two or more time periods are involved. In regression analysis. The value at the base time period serves as the standard point comparison. They are less unwieldy than large numbers and are readily understandable.

Frank. Andrew F.. Harry and Steven C. 2007.com/unstats. Himalaya Publishing House. 1995.un. and Archana Gupta.15. Spiegel M. 7th Ed. Sultan Chand & Sons. S.in/eands/Appendix%20II.com/ www. “Fundamental of Statistics”.Bibliography Books Gupta S.thehindubusinessline. Siegel. pp. Levin.bseindia. Statistical Method.C... 9. 4th Ed. “Practice of Business Statistics”. New Delhi.pdf /- 27 | P a g e . McGraw Hill Publication Co.encyclopedia.. Richard and David S. 7th Ed.1-9.D.investopedia.. “Statistics for Management”. “Statistics: Concept and Applications”. Cambridge Low-priced Editions.com/www.com/ www. Althoen. Rubin.. Web Site www.org/ www.pdf/dacnet. Irwin McGraw Hill.P. Prentice Hall of India.. “Theory and Problems of Statistics”. Gupta.wikipedia. Schaum’s Outlines Series.org/unsd/industry/docs/F1.nic.

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