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INDEX NUMBERS

PRESENTED BY

RADHEMOHAN SHARMA
NEIRAV CHOUHAN
CONTENTS

1.Introduction
2. Classification of index numbers

3. Method of constructing index
numbers
4. Value index numbers

5.Chain index numbers

6. References
INTRODUCTION
 Historical, the first index was constructed
in 1764 to
 compare the Italian price level in 1500.
through
 originally developed for measuring effect
change in price .
 Definition
 Index numbers helps us to find out
percentage change in the value of
different variables overtime with
reference to some base year which
happens to be year of comparison. When
the two various group are studies
simultaneously
 the percentage change is taken as
average of all groups.
CHARACTERISTICS
Ø Index numbers are specialized
averages.

Ø Index numbers measure the change
in the level of a phenomenon.
Ø
Ø Index numbers measure the effect of
change over a period of time.
USES OF INDEX NUMBERS
Ø They help in framing suitable
policies.
Ø
Ø
Ø They reveal trends and tendencies.
Ø
Ø
Ø Index numbers are very useful in
deflating ..
CLASSIFICATION OF INDEX
NUMBERS
Index numbers may be classified in

terms of what they measure . In
economics and business the
classification are:

Ø Price
Ø Quantity
Ø Value
Ø Special purpose
METHOD OF CONSTRUCTING
INDEX NUMBERS
1.UNWEIGHTED INDEX
NUMBERS
§ 1.Simple aggregate method -

§ 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.
P 01 =
∑p1
×100
§ ∑p 0
§
CONTD……………
 ∑p1 = TOTAL OF CURRENT YEAR PRICES FOR
VARIOUS
 COMMODITIES

 ∑p0 = TOTAL OF BASE YEAR PRICES FOR VARIOUS
 COMMODITIES


THE STEPS REQUIRED IN COMPUTATION
 :

 ADD THE CURRENT YEAR PRICES FOR VARIOUS
CONTD………….
Q. From the following data constructed an

index number for 2005 taking 2004 as base

Commodity & unit prices (2004)
prices(2005)
Butter (kg) 110
120
Cheese(kg) 75
80
 Milk(lt.) 13
13
Bread(1) 9
9
Eggs(doz.) 18
20

CONTD………
THE TOTAL OF 2007 means

∑p0 = 1075

THE TOTAL OF 2008 means

∑p1= 1102

P 01 =
∑ p 1
×100 =
1102
×100 = 102.5
∑p 0 1075
2. SIMPLE AVERAGE
OFRELATIVES METHOD
When this method is used to constructed a price
index
, price relatives are obtained for the various
items
included in the index and then an average of
these
relative is obtained using any one of the
measures of  p1 

central tendency ,
p
× 100
arithmetic mean
, median ,
P 01 ,=
mode etc.  0
× 100
When arithmetic mean N is used for averaging the
relatives .


CONTD…………..
 When geometric mean is used the formula would be


 p1 
∑log 
 p 0 ×100 

log p01 =  
N
EXAMPLE
From the data given below construct the index
numbers for 2007 taking 2006 as base by using

Arithmetic mean.

COMMODITIES
 PRICE IN 2006 (Rs.) PRICE IN 2007 (Rs.)

A 8 12
B 4 4
C 6 8
D 12 14
E 10 12
SOLUTION

COMMODITIES PRICE IN PRICE IN PRICE
2006 (Rs.) 2007 (Rs.) RELATIVES

A 8 12 150.00
B 4 4 100.00
C 6 8 133.33
D 12 14 116.66
E 10 12 120.00
CONTD………….
SOL.

 p1 
∑ p 0 ×100 
p01 =  
N

619 .99
= =123 .98
5
LIMITATIONS
A.It is not affected by the units in
which prices are quoted . It is
also not affected by absolute
values of prices as prices are
converted into price relatives.

B.

It gives equal importance to all items
2.WEIGHTED INDEX
NUMBERS
 Weighted index numbers as has
been stated earlier are those
numbers in which rational weights
are assigned to various chain in an
explicit fashion. The weights assigned
indicate the relative importance of
various items.

WEIGHTED AGGREGATIVE
INDEX NUMBERS
Ø These index are of the simple
aggregative type with the
fundamental difference that weight
are assigned to various items
include in various method of
assigning weights.
 some of the important methods are :
Ø Laspeyresmethod
Ø Paasche’s method
Ø Dorbish and bowley’s method
Ø Fisher ideal method
Ø Marshall Edgeworth method
Ø Kelly’s method
LASPEYRES METHOD
The method which uses quantities
consumed
during the base period , is the method
most
commonly used it requires quantity

measures for ∑
P 01 =
p1q 0
× 100
∑pq
only one period.


o 0

p1 = prices in the current year
p0 = prices in the base year

q0 = quantities sold in the year
PAASCHE’S METHOD
 This method was suggested by
Paasche’sin 1874. In this method the
weights of the current year are used.


P 01 =
∑ pq
1 1
×100
∑p q

0 1

 This method was suggested by
Paasche’sin 1874. In this method the
weights of the current
 year are used.

DROBISH & 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 Drobish & Bowley.

∑ pq + ∑ pq
1 0 1 1

p01 =
∑ pq ∑pq
0 0 0 1
× 100
2
Fisher’s ideal index
Fisher ideal index number is the geometric

mean of the laspeyers and paasche’s index
number.

P 01 =
∑q p × ∑q p
1 0 1 1
×100
∑q p ∑q p

0 1 0 1


 this is known as “ideal” because of following
reason :
1. It is based on geometric mean
2. It takes both current & base year prices and
quantities
Marshall-edgeworth
method
q In this method also both the current as
well as base year price and quantities
are considered.
q ∑
P 01 =

p1q 0 + p1q1
×100

∑p q +∑p q
0 0 0 1

q
Numerator consist of aggregate of current

year price multiplied by weight of both the
base year as well as current year.
 denominator consist of the base year price

multiplied by the sum of base year &
current years weight.
KELLY’S METHOD
q Kelly thinks that a ratio of aggregates with selected
weights (not necessarily of base year or current
year) gives the base index number .
 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.

p01 =
∑ pq
×100
1

∑p q 0
EXAMPLE
q index numbers of prices from the following data by
applying .
q (1) Laspeyers Index (2) Paasche’s Index (3) Dorbish
& Bowley’sIndex (4) Fisher Ideal Index (5)
Marshall-Edgeworth Index .

commodity Price(2005) Quantity(2005) Price(2006 Quantity(2006
) )
A 2 8 4 6
B 6 10 7 6
C 5 14 6 11
D 3 19 3 14
SOLUTION
COM P0 Q0 P1 Q1 P1Q0 P0Q0 P1Q1 P0Q1
MODY (2005) (2005) (2006) (2006)
IT
A 2 8 4 6 32 16 24 12
B 6 10 7 6 70 60 42 36
C 5 14 6 11 84 70 66 55
D 3 19 3 14 57 57 42 42
∑p1q0 ∑p0q0 ∑p1q1 ∑p0q1
=243 =203 =174 =145
CONTD………….
Laspeyres method-


p 01 =
∑ pq
1 0
× 100 243
= ×100 =119 .70


∑pq
o 0 203

Paasche’s method-

∑ p1q1 174
p 01 = × 100 = × 100 = 120

∑ p 0 q1 145
CONTD……..
Bowley’smethod-

∑ p 1q 0 ∑ p 1q1 243 174
+

+
∑ p 0 q 0 ∑ p 0 q1 = 203 145 ×100

p 01 =
 × 100 2
2

119 .70 +120 .00
 = ×100 =118 .60
 2


CONTD…………..
. Fisher Ideal Index Method-

P 01 =
∑q p × ∑q p
1 0 1 1
×100
∑q p ∑q p

 0 1 0 1

1.19×1.20 ×100
CONTD…….

=1.1949 ×100 =119 .49

Index number is 119.49

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.



pq 1 1
V = ×100
∑p q 0 0
THE CHAIN INDEX
NUMBERS
When this method is used the
comparisons are not made with a
fixed base, rather the base changes
from year to year. For example, for
2007,2006 will be the base ; for 2006,
2005 will be the same and so on.
 Chain index for current year

Average link relative of current year × Chain index of previous yr
=
100
REFERENCES
1. S.P. GUPTA “BUSINESS STATISTICS” .

2.RECHARD I. LEVIN & DAVID S. RUBIN

“STATISTICS FOR MANAGEMENT” .

3. B. M. AGARWAL