▪ An index number is a statistical device that measures the relative changes in prices and other related

variables, over particular period of time.

▪ Measures changes in the value of the variables such as prices of specified list of commodities, volume
of production in different sectors of an industry, production of various agricultural crops, cost of living
etc.
▪ It is basically an indicator. Eg. Price Index – changes in price levels of goods over a period of time.
▪ It measures changes with reference to base year.
▪ Base year – the period with which comparison is to be made.
▪ Criteria for selecting base year:
1. It should be a normal year with stable economic activity.
2. It should not be too far in the past. The gap between current year and base year should not be too
big.
▪ Value of Index number for this base year is 100.
▪ Index number are expressed in terms of percentage.
▪ The price of a packet of chocolate in the year 2018 was Rs 20 (P0) and the same for 2020 is Rs
30 (P1). What is the percentage change in the price?
▪ Index Number = (P1/P0)*100
▪ Index Number = (30/20)*100.
▪ Index Number = 150
▪ This means that if the price was 100% in 2018 then it has become 150% in 2020.
▪ Therefore, we can say that there is a 50% increase in the price in 2020 in comparison to 2018.
▪ There are two types of Index Numbers:
▪ Price Index Number : Indicates the change in price levels of goods over a time period.
1. Wholesale Price Index : It measures the average change in wholesale price level over a
particular time period.
2. Consumer Price Index/ Cost of Living Index : It measures the average change in retail
prices over a particular time period.
▪ Quantity Index Number : Indicates the change in volume of agricultural production,
industrial production, export – import.
1. Index of Industrial Production : It measures the average change in quantity of industrial
production.
▪ There are two methods of constructing an Index Number:

Construction of Index Number

Aggregative Method Method of Averaging Price Relatives

Weighted
Simple Average of Price
Simple Weighted Relative Method
Aggregative Aggregative Average of
Price Relative ( also known as
Method Method Family Budget
Method
Method)
▪ Simple Aggregative Method :

▪ Where P1 is the price of commodities in the current year and P0 is the price of commodities in the
base year.
▪ Weighted Aggregative Method :
1. Laspeyre’s Price Index :
▪ where q0 is the base year quantity.
2. Paasche’s Price Index:

where q 1 is the current year quantity.

Laaspeyre’s price index helps in answering the question that if the expenditure on a basket of
goods in the base period was Rs 100, how much should be the expenditure on the same basket of
goods in the current period.
Paasche’s price index helps in answering the question that, if the current period basket of goods
was consumed in the base period and if we were spending Rs 100 on it, how much should be the
expenditure in current period on the same basket of goods.
▪ Prices of commodities for the year 2000 and 2004 are as given in the table. Find the simple
aggregative price index from the data displayed in the table.
Example 1:

▪
Solution: ->

It indicates that the prices in the year 2004 had increased by 14.3 %
as compared to the year 2000.
▪ Prices of commodities for the year 2000, 2001, 2002, and 2003 are as given in table. Find the
simple aggregative price index from the data displayed in the table taking 2000 as base year.
▪ Example 2:

▪ Solution->
▪ Simple Average of Price Relative Method :

B. where, N is the number of commodities.

▪ Weighted Average of Price Relative Method :

where “w” is the weight or the quantities of commodities.

▪ Prices of commodities for the year 2000 and 2004 are as given in the table. Find the price index by a
simple average of relative method and using the arithmetic mean from the data given in the table.
▪ Example: 1. Price index number by simple
average of price relative method
using arithmetic mean for 2004
taking 2000 as base year is
Solution-> given by.
P01 = (1/N)(ΣR)
P01 = (1/5)(730)
P01 = 146.0
▪
▪ .

▪
▪ Consumer Price Index :
It shows the changes in the price level of a specific basket of goods and services purchased by the
consumers or households in the current year compared to the base year.
CPI is also known as Cost of Living Index, so it also measures the change in the cost of living in two
different situations.
In order to construct the CPI we can use either the Laspeyre’s Method / Aggregate Expenditure
Method or the Family Budget Method.
Uses :
▪ Used to measure purchasing power of money.
▪ Formula for purchasing power of money : (1/CPI)
▪ CPI is used as a base for determining the real wages and dearness allowances of workers.
▪ Real Wage = ( Money Wage / CPI ) * 100
▪ Provides guidelines to the government for determining different economic policies.
▪ Wholesale Price Index :
▪ It measures the relative changes in the prices of goods in the wholesale market. It does not
include items pertaining to services ( repairing, barber charges, etc. )
▪ It is based on the wholesale prices of a few commodities.
▪ It is a weighted index where weights are assigned for different categories of commodities,
such as food products, fuel and energy products and manufacturing products.
▪ In this case also Laspeyre’s Method can be used to calculate the WPI.
▪ It focuses on the prices of the goods traded between wholesale traders rather than prices of
the goods bought by consumers.
▪ WPI is used by the government to measure inflation in the economy.
▪ Index of Industrial Production :
▪ This index shows changes in the volume of industrial production in an economy between the
current and base year.
▪ It shows how much output has changed due to different industrial activities such as mining,
manufacturing, electricity, related activities.
▪ Formula for construction of Index of Industrial Production (IIP) :
▪ The purpose of the index number should be very clear.
▪ Base year should be selected carefully.
▪ Appropriate formula should be used.
▪ Items to be selected for including in the index number calculation should be
selected carefully.