141
Chapter8
8.1. INDEX NUMBERS
8.1.1.
When ratio Meaning and
or average of ratioDefinition
is stated in
form then it is known as index percentage
number, In other
words. index number is a statistics
which is uscd to
quantify trend by assigning a single numerical
the various single statistics. In an value to
or more than twO index number, two
numbers arc used.
Basetime period is one of thern and the value of
basc time
period works as a standard point of
comparison. When a
researcher creates a list of index number
for
than two periods of time, then it is known. astwo or more
index time
series. Same base year is used for every index number.
According to Maslow, It is a numerical value
characterizing the change in complex
cconomic
phenomena over a period of time or space."
According to John Riffin, "Index numbers are used to
measure changes over time in magnitudes which are not
capable of dírect measurement."
According to Spiegal, "An index number is a statistical
measure designed to show changes in a variable or a group
of related variables with respect to time, geographical
location or other characteristics."
Accordingto Wheldon, An Index number is a statistical
device used for indicating the relative movements of the
data where measurement of actual movements is difficult
or incapable of being made."
According to L. J. Kaplan, "An index number is a statistical
measure of fluctuations in a variable arranged in the form of a
series, and using a base period for making comparisons."
According to Croxton and Cowden, "Index number is a
device for measuring differences in the magnitude of a
group of related variables.'
1T we wish to compare the prices of consumer items
today with their prices ten years ago, we are not
interested in comparing the prices of only one item, but
In comparing average price levels. We may wish here
again, we have to consider all items of production and
Cach item may have undergone a different fractional
Increase (or even a decrease). How do we obtain a
COmposite measure? This composite measure
provided by index numbers, whích may be defined as a
device for combining the variatíons that have occurred
3a group of related varíables over a period of tíme, to
Index Numbers
obtain a figure that represent, the 'nct' result of the
change in the constitute variables to compare the
present agricultural production or industrial production
with that at the tíme of independence.
8.1.2. Problems in theConstruction of
Index Numbers
1) Definition of the Purpose: ndex nurmbers are
Constructed for different purposeh, 0 it is necessary
that the purpose is clcarly defined, for which the index
nurnber is being constructed and calculated.
2) Selection of the Base Year: In a relation, base year
represents the ycar with which other year's data is
compared. This comparison shows the percentage of
increase or decrease in the respective years. Base year
is a standard year which is free from sudden or
abnormal conditions (such as carth-quake, draught,
ctc.) because these conditions cause sudden chanye in
the data (such as quantity, price, etc.)
3) Selection of the Items and their Varieties:
Selected items and their varieties for index number
should not be too large or too small because it is
difficult to manage large number of items while too
small number of items would not be sufficient to
reflect thevariation ín the level of the dala.
4) Collection of the Data Relting to Price and
Quantities: Collected data may be primary or
secondary (depending on the need of the index
number). Relevance and credibility of data quantity
and its price collection purpose is responsible for the
accuracy and integrity of an index number.
5) Assignment of Weights: Assigning of various
weights to the different items of index number should
be rational and free frorm bias. Following arc the
basis of assigning weights:
i) Quantity of the item consumed, produced and
distributed.
ii) Value of itern consurmed, produced and dístributed.
The assignment of weights to the various ítems of
index number is done in such a way that they are
purposeful and truly illustrative.
6) Selection of a Suitable Method of Averaging: Index
nunbers give a calculation of the average value of an
identity with reference to the base period. In other
words, they are indicators of relative changes of an
identity over a defined period of time.

142 (Modulo 2)
7) Choice of the Appropriate Formula: Care should be
taken while making a choice of formula during
construction of index numbers for linding truc and
fair result.
8.1.3. Notations used in Index Number
Base Year The ycar selected for the comparison, i.e., the
year with refcrence to which comparisons are
made. It is denotcd by '0'.
Current The yer for which comparisons are sought or
Year |required.
Po Price of a commodity in the Base Yeur.
P Price of a commodity in the Current Year.
|Quantity of a commodity consumed or purchased
in the Base Yeur.
Quantity of a commodity consumed or purchased
in the Current Year.
|Weight assigncd to a commodity according to its
relative importance in the group.
Pon Price Index Number for the base year with
reference to the current ycar.
P10 Price Index Number for the current year with
reference to the base year.
Quantity Index Number for the base year with
qo1
reference to the current year.
Quantity Index Number for the base year with
reference to the current year.
Price The price corresponding to different time periods
(quantity) expressed as ratios to the base year prices are
Relatives termed as price relative. Thus if P, P2, P3,
are the prices in period 1, 2, 3,....., and Po is
the price in the base period, then
PL P2 P3 . , are the price relatives for thel
Po Po Po
period 1, 2, 3,.....respectively.
|Similarly. the quantity relatives for period 1, 2,
3,.....,. are 92 93 respectively.
8.1.4. Types of Index Numbers
Fundamentally index numbers çan be categorised into
following types:
1) Price Index Number: These are the simplest and
most commonly used index numbers. They are used
to measure the variation in the price of commodities
consumed in a given period of time. To measure the
variation or change in price of commodities it uses
the base period as a reference. Following are the
types of price index numbers:
i) Wholesale Price Index Number: It is used to
find out the variation in the general price level of
a product or service.
ii) Retail Price Index Number: It is used to find
the variation in retail price of a product or service
(bought and sold in the retail market).
2) Quantity Index Number: In a given time period,
quantity index number helps in calculating and
comparing the physical quantity of goods (sold,
purchased and produced by an organisation).
MBAFirst Semester (Statistics for Management) BU
3) Value Index Number: These are used to find out of
thc variation in the value of commodities and
collection of commodities consumed or purchased in
a time period with reference to the base period.
4) Simple Index Number: Index numbers for individual
commodities are known as simple index numbers.
5) Aggregate (or Composite) Index Number: Creation
of index number for a group of commodities is termed
as composite (aggregate) index numbers.
6) Cost of Living Index Number: It is also known as
'consumer price index number'. It is used to compare
the average variation in expenses and consumption of
the commodity from one time period to another. It is
also used to measure the variation of an individual
class of customers.
8.1.4.1. Construction of Price Index Number
Price index number is used to compare a grOup of products
at a given time and place. Base period price or place is
used to compare the given price. To calculate the price
index number following formula is used:
Po, =Lx100
Po
Where, Po = Price index number of the curent year on the
basis of the base year'sprice.
Let's take an example where price of rice in India in 2014
was 850 per quintal and in 2013 it was 750 per quintal.
Then the price relative for 2014 is:
85
x100 = 113.33%
75
Note: 2013 taken as base year.
Thus, Price relative is the percentage of price of th
commodity in a specific year and the price of the san
commodity in a given year.
8.1.4.2. Construction of Quantity/Volume
Index Number
To find out the variation in level of quantities of items
(produced, consumed or distributed) in a year with
reference to base year quantity, this index number is used.
Following is the simplest formula used to calculate the
quantity index number:
Qoi =x100
Where, Qo = Quantity index number of the
current year
on the basis of the base year's quantity.
the
Where qi is the quantity of current year and qo is
quantity of the base year. The ratio i00 is called the
the
quantity relative of the current year with respect to
suppose the productionof rice in
base year. For example, 1000 ton;
India in 2006 was 1200 ton and in 2005 it was
under
then the quantitative relative (since quantities are
study) for 2006, (using 2005 as base) is
1200 x100 = 120%
1000
Index Numbers (Chaptor 8)
8.1.4.3. Construction of Value Index Number
l measures changes in total monetary worth. It combines
price and quantity changes to prescnt a morc informative
index. Index of GNP and index of retail sales arc the
Cxamples. Valuc-index number is used to compare the valuc
of a particular period with the total value of the base period. It
is used to construct and mcasure the variation in the item's
(price and product of the quantity) value with reference to the
consumption in the present ycar and base ycar. For a
commodity, if p1 nd qi arc the pricc and quantity in thc
current year and for the same commodity po and qo are the
price and quantity in the base year,then for the calculation of
value index number following fornula is used:
-x100
Vo
Where,
V,=pg, is the value of current year:
Vo= Poqo is the value of the base year.
The ratioLx100 =Ix100 is known as the value
Vo Po40
relative of the current year with respect to the base year.
For example, suppose the price of wheat in India in 2008
was 950 per ton and production was 1200 ton and in
2007 it was 800 per ton and production was 1000 ton;
then the value relative (since values are under study) for
2008, (using 2007 as base) is
(950x1200)-x100 95x12
=142.5%
(800× 1000) 8
8.1.5.
Importance of Index Numbers
1) Interpretation of changes in internal price level can be
done using index numbers.
2) Rise or fall in forèign trade can be known by the use
of such indices.
3) Indices like cost of living indexx number can, be used
tointerpret the changes in cost of living in a country.
4) Trend in production can be studied by using indices
and facilitates the government to make policies for
the industries.
S) Aplanned economy can run smoothly by efficient use
of index numbers. With indices stratégy makers can
have accurate details about the financial situation of
the country and thereby formulate policies for the
well-being of the people.
8.1.6. Limitations of Index Numbers
1) Samples of items and quantities are used to calculate
index numbers. Sampling is generally biased thus
introducing errors in the calculation. So efforts have
to be made to minimise such errors.
2 Tastes and preferences of customers change with the
changing time so quality of item'can change. Using
new quality and obsolescence of other can make the
comparison wrong over long periód.
3) Different index numbers are constructed by different
methods. Thus, it can give different results in
different cases.
143
4) Manipulation in index numbers can be donc to serve
particular purposes. High profit year an be made base
period thereby showing the profit in current year as less.
5) Data collection by various sourccs, rcgions cannot be
always rcliable as the quality of data is also affected
by collector's intelligence.
6) Index numberS cannot be used in the internatíonal
Context.
7) Index numbers are the approzimate indicators of an
cven/quantity/item.
8.1.7. Uses of Index Numbers
1) Index numbers are the guíde to business policy and
strategy. Changing situations require different
adaptations:
i) An incrcase in price will mean one set of policies,
ii) A decrease in price means a different set of
policies, and
iii) A stable and rising price level means a positive
factor of the industrial growth.
Business production index number shows the rising
and falling production, which can be further used for
the comparison (comparison of own production at
different time periods).
2) Organisations can also use the index number for
forecasting (when index numbers are compiled into
a series).
3) A firm may sell various products at a time and all of
them may have different unit prices with different
price fluctuations.
In this case index numbers help to find the increase in
physical volume as opposed to rupee value. Sales
value in terms of current prices can be deflated by
dividing them by index of firm's prices.
4) Index numbers can also be used to adjust employee
allowances by virtue of inflation such as the dearmess
allowance is calculated keeping in view the increase in
consumer price index. So, consumer price index is
actually used to compensate employees against inflation.
5) Another, index number, called 'productivity index', is
used to give extra benefit to more efficient employees
or workers. Workers are given 'productivity bonuses'
if the overall productivity of the firm increases.
8.2. METHODS OF
CONSTRUCTING INDEX
NUMBERS
8.2.1. Simple and Composite Index
Number
The first step in constructing an index number is the
choice of base period. It is the time in past from where all
comparisons are to be done:
1) Base period should not be too old so that the
Çomparison is not affected by change in technology or
change in consumer preferences.
 152 (Module 2) MBA First Semester (Statistics for

D
15419
7012\21| 175
475 60 28500 Stens in Construction of Fixed Base Index
Following steps are used to calculate the fixed
Management) Bl
840 147000
Total base
1) First find the price relatives using following
|ZP=975 W= SPW index:
1880
330500
Price Relatives= Current Year's Price
Base Year's Price xI00
formula:
Consumner Price index number = }PW 2) In case of a single commodity, the
would be the fixed base index. In casepriceof relmulatitvipesle
commodities, first add each year's price
330500 then divide the result by the number of relatives and
Thesecommodities
=175.79
1880 to find the average of price relatives.
are known as fixed base indices.
shows the construction of the fixed base index Following averexamplagese
8.2.7. Fixed Base and Chain Base Example 14: Find-out the fixed base index
Index Number 2012, 2013, and 2014 based on 2011. number for
There are two methods of selecting a base year: Commodity Price in Price in Price in
1) Fixed Base Method () 2011 (0 2012 ) 2013 | Price in
) 2014
2) Chain Base Method 30
A 20
B 12 16
8.2.7.1. Fixed Base Method 18
14 20 28
In this method base year is fixed. For example, let's
D 10 12
construct index for 2011, 2012, 2013, and 2014. Here, 16
2011 acts as a base year for all the years. This index is E 16 22 20 26
known as fixed base index.
Solution:

Computation of Fixed Base Index Numbers

Commodity Po 2011 P 2012 P2 2013 P3 2014
Price Price Price Price Relatives
Relatives Relatives Relatives

Plx100 P2100 P3x100

Po
Po Po
A 15 100 30 200.0 20 133.3 24 160
B 100 12 150.0 200 18 225
14 100 20 142.9 28 200 12 85.7
D 10 100 8 80.0 12 120 16 160
E 16 100 22 137.5 20 125 26 162.5
Total of Relatives 500 710.4 778.3 793.2

.Price Index for 2012 =

Sx100
Po
N
710.4 142.08;
Price Index for 2013 = Po sP2x100
778.3
5
155.66
zPx100
Price Index for 2014 = Po 793.2
=158.64
N 5

8.2.7.2. Chain Base Method

In chain based index Steps in Construction of Chain
number the figure of every year is
shown as percentage of previous years. To construct a chain based indexIndex Number
Then percentages are used:
number following steps
are chained together by
consecutive multiplication,
creates a series of chain index. which Step 1: Link relative is a process which is
every year's used to prese
In this method, the base figures as the percentage of the preceding
year year. Mathematically it can be written as,
and the immediate earlier year changes from year to year,
works as a base year for the Link Relative = Current year's price
curent year. For example, 2013 works as
the year 2014.
base year for
Previous year's price-x100
It is used to compare one year
with another.
Index Numbers (Chapter 8)
Step 2: For constructing the index 153
these perccntages by successive number, chain together 8.2.7.3.
Difference between Fixed Base and
formula is uscd to multiplication. Following
calculate the chain index of any year: Chain Base Index Numbers
Averagd.inkRelativeof CurrentYcarx Chainlndexof PreviousYcar Fixed Base Index Chain
Base Index Number
100 Number
In fixed base
It(chain index)helps to create a
long-term index, thel In chain base index
comparison. |base year remains fixed. new numbers
Advantages of Chain Base Index Number commodities Can
introduce and delete the
Following are the advantages of chain base index number: The existing.
|) Economists, businessmen, ctc. use it for the fixed-base indexThe
comparison analysis on ayearly basis. numbers are not free from numberschainare base index
free from
2) Without any recalculation, it is pOssible |cyclical and seasonallcyclical
to introduce and seasonal
ncwitems and omit old items, variations.
variations.
3) It is possible to present the Fixed-base index
numbersChain-base index numbers
fundamental picture of are
usually easier to are not easier to calculate.
activities in a time period. calculate.
4) It has less effcct of seasonal variation.
Differcnce between Chain Base Index Number and
Disadvantages of Chain Base Index Number Fixed Base Index Number
1) Link relatives are used to Chain base index numberS are
calculate long range calculated by using Iink
relatives while original data is used
comparisons of chained percentages. to calculate the fixed
2) In a period of time, it cannot provide any precise
price index numbers.
picture of the movements.

Example 15: Construct chain base index number from the following data:
|Year
|Production of Rice (in Million Tonnes) 20092010|2011
120 132 138 2012|2013
146 160
Solution:
Year Production of Rice Link Relatives Chain Base Indices
(in Million Tonnes)
2009 120 100.00 100.00
2010 132 132 110
x100=110 -x100 = 110
120 100
2011 138 138 104.5
-x100 = 104.5 -x110=114.95
132 100
2012 146 146 105.8
x100 = 105.8 -x114.95 = 121.62
138 100
2013 160 160 109
-x100 = 109.6 -x 121 .62 = 133.30
146 100
Example 16: From the following data relating to production of wheat for the Ten years, construct
1) 2003 as base year, and index numbers:
2) By chain base method.
Year |2003|2004|20052006\20072008|2009\2010 2011|2012
Production of Wheat
24 34 42 38 36 30 39 41 43 48
(in Lac Tonnes)
Solution:
1) Index Numbers, with'2003 as Base
Year Production of Wheat Index Numbers
2003 24 100
2004 34 34
x100 =141.07
24
2005 42 42
-x100 = 175
24
2006 38 38
-x100 = 158.3
24
2007 36 36
-x 100 = 150
24
 154 (Module 2) MBA First Semester (Statistics for Management) R

2008 30 30 -x 100 = 125

24
2009 39 39 -x 100 = 162.5
24
41 41 -x100 = 170.8
2010
24
43 43 -x 100 = 179.2
2011
24
48
2012 48 -x 100 200
24

2) Chain Index Numbers

Chain Index Numbers
Year Production of Wheat Link Relatives
24 100.00 100
2003
2004 34 34 x100 = 141.7 141.7×100
= 141.7
24 100

2005 42 42 -x100 = 123.5 123.5x 141.7-= 175

34 100
2006 38 38 90.5x175
x100 = 90.5 =158.4
42 100
2007 36 36 94.7x158.4
x 100= 94.7 -=150
38 100
2008 30 30 83.3x150
X100=83.3 =124.95
36 100
2009 39 39 130x 124.95
x100 = 130 = 162.4
30 100
2010 41 41 105.2x162.4
x100 = 105.2 =170.8
39 100
2011 43 43 104.9x170.8
x100= 104.9 = 179.17
41 100
2012 48 48 111.6x179.17
43
x100 =111.6 =200
100

8.2.7.4. Base Conversion Solution:

Sometimes it is required to change the fixed base index Conversion of CBI into FBI
into chain base index and vice versa. Following are the Year CBI Conversion FBI
methods used for the conversion. 2010 136 136.00
2011 162 162×136 220.32
Conversion from Chain Base Index (CBI) to Fixed
Base Index (FBI) 100
To convert chain base to fixed base index following 2012 148 148x 220.32 326.1
method is used: 100
1) FBI has same base as CBI, for the first year. 2013 154 154x326.1 502.2
FBI is
taken as 100, if first year is working as base in 100
a problem. 2014 185 185 x 502.2 929.07
2) Following formula is used to calculate the fixed base 100
indices for the succeeding years:
3) Curent Year's FBI Conversion from Fixed Base Index FBD to Chain Base
Index (CBI)
Current Year's CBIx Previous Year's FBI Following process is used to convert the fixed base 0
100 chain base index:
1) CBI has same base as FBI, for
Example 17: From the chain base index number given the first year.
2) Following fomula is used to calculate the chain baseo
below, prepare fixed base index numberS: index from the fixed base index for the succeedingyear.
Year 2010 2011 2012 2013 2014
CBI 136 162 148 154 185
Current Year's CBI =: Current Year's FBI x100
Previous Year's FBI
 MODULE-5
INDEX NUMBERS

Introduction
Index numbers are the indicators which reflects changes over a period of time in (i) prices
of different commodities; (ü) industrial production; (i) sales; (iv) imports and exports: (v)
Cost of living etc. These indicators are of paramount importance to the management of
personnel or any government organizations or induStrial concern for the purpose of
reviewing position and planning action, if neceSsary; and in the formulation of executive
decisions. They reflect the pulse of an economy and serve as indicators of inflationary and
deflationary tendencies. Just as in physics and chemistry barometers measures the
atrmospheric pressure or pressure of gases, so in economics, index numbers measure the
pressure of economic behaviour and are rightiy termed as 'economic barometers. Since a
look at some of the important indices like index numbers of wholesale prices, industrial
production, agricultural production, etc. gives a fairly good idea as to what is happening to
the economy of a cOuntry.
Index numbers were firstly given by Mr.Carli in the year 1750. The main motto of him to
introduce this type of number is to check whether or not, there would be a change in the
prices in Itly due to the discovery of America by taking into account of two centuries i.e.,
1500as base year and 1700 as current year. But his discovery was an utter failure due to
one reason which you willlearn inthe 'steps in the construction of index numbers'.
Definitions:
"An index number is a device which shows by its variation, the changes
in a magnitude which is not capable of accurate measurement in itself
or of direct valuation in practice".
- Wheldon
"Index number shows by its variation, the changes in a magn+tude
which is not susceptible either of accurate measurement in itself or of
direct valuation in practice".
- Edgeworth
"It is anumerical value characterizing the change in complex
phenomena over a period of time or space" economic
- Maslow
"An index number is a statistical measure designed to show
a variable or a group of related variables with changes in
respect to time,
geographical location or other characteristics"
- Spiegal
"Index numbers are devices for measuring differences in the
of a group of related variables" magnitude
Croxton & Cowden
"An index number is a percentage relative that
compares economiC
measures in agiven period with those same measures
in the past" at a fixed period

- Clark and Schkade

Characteristics of Index Numbers: On the basis of the study and analysis of definitions
of Index number, the following
1. characteristics are worth considering:
Index numbers are specialized
averages.
BUSINESS STATISTCS
2 Index numbers are expressed in percentages.
relation to time or place
3. Index numbers measure the effect of changes in
Uses of Index Numbers
supply.
1. Helps in studying trends and forecasting demand and
2 To measure and compare changes
3. Helps in policy formulation.
4. It acts as economic barometers.
Helps to measure changes in price level.
6. It is very useful in deflating.
7. It helps to measure purchasing power
8. It helps in deflating various values.
9. Indicator of rate of inflation.
Construction of Index Numbers: The following are some points involved in the
Construction of index numbers.
1. Object of Index Number: The statistician must clearly define the object for which
the index numbers are to be constructed, because indexed numbers are nt
prepared for all purposes.
2. Selection of Base Period: Every index number must have a base, For the
construction of index number, the selection of appropriate base period is very
important. Base period is also be called as previous period. One cannot say
whether the price level has increased or decreased, unless one compares the price
level of the current year with the price level of the base year.
3. Selection of Commodities: Selection of commodities is mainly based on the
purpose of the index number. The selection of commodities difers with purpose of
index number. The items or commodities are to be selected based on homogeneity.
For instance, if we study the changes in production of cloth, then we may incude
the production of millcloth, powerloom cloth, handloom, silk, khadi, etc.
4. Source of Data: Reliable source of data is important. The price relating to the
things to be measSured must be collected. For the construction of index number, the
prices of commodities are collected from the public sources or from the standard
Commercial news magazines. But the price must be representative, accurate and
comparable.
5. Selectionof Averages: One can use any average. But in practice, the arithmetic
average is used, because it is easy for computation.
6 Weights: In calculating weighted price Index, a number of difficulties arise. The
problem is to give different weightsto commodities. The selection of higher weight
for one commodity and a lower weight for another is simply arbitrary. There is no
set rule and it entirely depends on the investigator. Moreover, the same commodloy
may have different importance for different consumers. The importance of
commodities also changes with the change in the tastes and incomes of consume
and also with the passage of time. Therefore, weights are to e revised from time to
time and not fixed arbitrarily.
Notations: Before going to discuss the methods or types of index number, it is necesa
toknow the following notations, which are used while constructing the index number:
Base year: Base year is the year which is selected for comparison with reference to u
current year. It is denoted by "0".
Current year: The year for which comparisons are made or required to make and is
denoted by"1".

306
 INDEX NUMBERS
Price of commodity in the base year
Price of oommodity in the current year
Quantity of commodity purchased or consumed during the base year
Quantity of commodity purchased or consumed during the current year
W Weight assigned to a commodity according to its relative importance in
the group
V Value of aommodity i.e., price x quantity
Po1 Price index number for the Current year with reference to the base year
P0 Price index number for the base year with reference to the current year
Qo1 Quantity index number for the current year with reference to the base
year
Q10 Quantity index number for the base with reference to the current year
Methods of Index Numbers

Unweighted Weighted

Simple price Simple average Weighted price Weighted

aggregate of price relative aggregated average of
price relative
Unweighted Index Numbers
Simple Price Aggregative Method: This is simplest method of construction of
price index by taking into consideration prices of base year and current year.
following formula is used for the construction of simple price aggregate index The
number:

Po1 Spi x100

Spo
Where,
Po1 Price index of simple aggregative method i.e., price index number for
the
Current year with reference to the base year.
Sum of Current year prices for various
Spo
Commodities.
Sum of base year prices for various commodities.
Example-1: Construct price index number for
aggregative method taking 2014 as base year. the following data by using simple price
Commodities Prices in 2014 Prices in 2015
A 60 70
70 75
55 60
D 50 65
Solution: Construction of price index (simple aggregate method). Firstly we
of base year (i.e., prices in 2014) as p% and current denote prices
year (i.e., prices in 2015) as pl.
Commodities Prices in 2014 (po) Prices in 2015 (p)
A 60 70

307
 INDEX NUMBERS
Prices Quantities
Items 2012
2015 (p1) 2012 (4o) 2015 (q) P1q1 Poq1
(po)
A 100 125
1125 900
120 140 10
B
90 110 5
coo 1120 960
C 7 770 630
D 80 90 6
720 640
Zp1q1=3735 Epoqi=3130
Iet De = Prices of 2012; p1 = Pricesof 2015; qo = Quantity of 2012; gi = Quantity of 2015
3735
Pot (P) = ZP;91 x 100 =
3130
x 100 = 1.1933 x 100
Zpo91
119.33
3. Fisher's Ideal Index Number: This meth0d is consiVered to be the best average
for computing an index number, because this method is based on the geometric
mean. In other words the Fisher's Price Index is a geometric average of the
Laspevr'ss Price Indéx and Paasche's Price Index. This.method is also based on al
the four terms i.e., prices in base and current year and quantities of the base and
Current year. This method is called as ideal indeX number as it satisfies the time
reversal test" and "the factor reversal test" and as it corrects the positive price bias
in the Laspeyer's Price Index and negative price bias in the Paasche's Price Index.
The Fisher's ideal price index is calculated in the following manner:

Po1 (F) =
}po41
x 100 = JLxP
Where,
= Laspeyre's price index
P = Paasche's price index
Example-5: Construct the Fisher's Ideal Price Index from the following data:
Items Prices in 2012 Prices in 2014 Quantity in Quantity in
2012 2014
Wheat 2.00 2.50 20 22
Sugar 3.00 3.75 15
Milk 17
1.50 2.00 25 16
Solution: Construction of Fisher's Ideal Index
Items Po P1 o q1 P190 PoQo P191
Wheat 2.00 2.50
Po1
20 22 50.00 44.00 55.00 44.00
Sugar 3.00 3.75 15 17 56.25 45.00 63.75 51.00
Milk 1.50 2.00 25 16 50.00 37.50 32.00 24.00
156.25 126.50 150.75 119.00
Put, £poqo Zp1q1 Epoq1
Po Prices of 2012
P1 Prices of 2014
Quantity of 2012
Quantity of 2014

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156.25 150.75 X100
|Ep;90 yp:41 x 100 = X
V126.50 119.00
Po1 (F) =
Zpo0 Zpo41
x 100 = 1.2509 x 100
= V1.2352x1.2668 x100 = /1.5648
Po1 (F) = 125.09
Relative: In the weighted method aggregative
Weighted
were Average Price
not computed. If we know the values consumed in the base year, then we can price relatives
construct the weighted index according to the weighted average of price relative method:
PV
Po1
EV
Where
Price relative ( Po x100)
V = Value (Pogo)
Steps:
1,
Pi x 100.
Find the price relatives for each item ie., Po

2 Multiply the price relatives with corresponding value i.e., Poqo.

3.
Obtain the sum of products obtained in step-2 for all the items to get EPV,
4. Divide the sum in step 3 by sum of value (2V) to get the index of weighted average
price relative.
Example-8: Construct weighted average price relative index from the following information:
Prices Quantities
Items
2012 2014 2012 2014
A 5 6 5 4

7 5 10
C N
4 7 10

D 2 6
Solution: Construction of price index (weighted average price relative)
Prices Quantities
Items P= X100 V=poqo PV
2012 2014 2012 2014
P
(Po) (P:) (qo) (41)
n
5 3000.00
A 5 6 120.00 25
B 7 5 10 70 5000.10
71.43
C 4 7 8 10 175.00 32 5600.00
2 3 6 9 1800.00
D 150.00 12
EPV=15400.10
EV=139
Put,
Po Prices of 2012
Prices of 2014
Qo Quantity of 2012
Quantity of 2014
EPV 15400.10
Po1
EV 139

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Solution: Calculation of consumer price index by aggregate expenditure method

Quantitles Prices
Items P1qo PoQo
2016 (qo) 2018 (41) 2016 (po) 2018 (p)
A 10 12 1.50 1.75 17.50 15.00
20 25 2.20 2.65 53.00 44.00
30 28 3.60 2.50 108.00 108.00
D 8 1,00 1.60 8.00 5.00
Spiqo=186.5 poqo172.0
Consumer price index (aggregate expenditure method)
186.50
x100 = x 100
Po1 172.00
SpoA%
108.43
5-Marks Illustrations
Illustration-1: Construct the price index from the following data by using simple
aggregate method):
Commodities Prices in 2018 Prices in 2019
A 80 90
B 60 80
90 110
D 40 35
Solution: Calculation of price index number by simple aggregate method
Commodities Prices in 2018 Prices in 2019
A 80 90
B 60 80
90 110
D 40 35
Zpo=270 Ep=315
P1 315
Po1 x 100 = x 100
Epo 270
116.67
This means that the prices have increased in the year 2019 to the extent of 16.67% as
compared to the prices of 2018.
Ilustration-2: Compute the price index for the following by average price relative
method:

Prices Commodity
N P Q R
Price in 2017 40 30 60 70 80 20
Price in 2018 60 50 30 90 60 40
Solution: Computation of average of price indexX
Prices in 2017 Prices in 2018
Commodities Price relative P=(P1+po) x 100
(Po) (P:)
M 40 60 66.67
N 30 50 60.00

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 INDEX NUMBERS
No. of Commodities = N
Construction of index number (simple average price relative method)

Commodities Po P1 P= Plx100
Po

A 20 25 125.00
B 25 35 140.00
C 15 20 133.33
D 30 40 133.33
10 20 200.00
E
N=5 2P=731.66
731.66
Po1 5
N
146.33
when
This means that the prices have increased in the year 2014 to the extent of 46.33%
compared with the prices of 2012.
Weighted Index Numbers: Weighted index numbers are of two types, namely
a Weighted aggregative method and
b) Weighted average of price relatives method
a) Weighted Aggregative Index Number: In this method, the prices and weighted
quantity both are considered. Here, physical quantities are used as weights. There
are various methods to construct weighted aggregative index number. Some of
them are used as follows:
1. Laspeyre's method
2 Paasche's method
3 Fisher's ideal method
4. Dorbish and Bowley's method
5. MarshallEdgeworth method
In this weighted aggregative index number, our discussion is restricted to only
Fisher's Ideal method.
1. Laspeyre's method: In this the base year quantities are taken as weights. Now
price index is calculated by using Laspeyre's formula is as follows:
Po1 (L) = x 100
Epo90
Steps:
1 Multiply the current year prices (P) of various commodities with base year
quantities (q0), Sum up p1x qo and get Ep:go.
2. Similarly, multiply the base year price (po) of various commodities with base
year quantities (o), sum up po x qo and get Zpoqo
3. Divide Ep:qo by poqo and multiply the quotient by 100. Then we get price
index (i.e., Po1 (L)).

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Example-3: From the following given information. Calculate the Laspeyre's price index.
Base year Current year
Quantities
Items
Prices Prices Quantities
Wheat 10
(Kgs)
5 12
(Kgs)
15 3 13 5
Paddy
10 2
Jawar
Solution: Calculation of Laspeyre's Price Index
Base year Current year
Items P1qo Poqo
Prices Quantities Prices Quantities
Wheat 10 5 12 4 60 50
15 3 13 5 39 45
Paddy
Jawar 2 10 2 20 16
}piqo=11 Epoqo=11

119
Po1 (L) = Ep140 x 100 =
111
X 100
Zpo40
107.21
Let,
Po Base year price
P1 Current year price
Base year quantity
Current year quantity

2. Paasche's Method: According to this method, the current year quantities are taken
as weights. Now the price index is by using Paasche's method is as follows:
Po1 (P) = x 100
EpoQ0
Steps:
1. Multiply the current year prices (pi) of various items with current year quantities
(g), sum up pxqi and get p191.
2. Similarly, multiply the base year price (po) of various items with current year
quantities (q1), sum up poxq1, and get pqi.
3. Divide the p:q1 by Epoq1 and multiply the quotient by 100. Then we get Paasche's
price index i.e., Po1(P).
Example-4: Compute the Paasche's price index number from the following information:
Prices Quantities
Items
2012 2015 2012 2015
A 100 125
B 120 140 10 8
.90 110 5 7
D 80 90 6 8
Solution: Computation of Paasche's price index number

310