INDEX NUMBERS
Presented by- neha mehta(4222)
B.COM - I
- smriti rana(4276)
CONTENTS
Introduction
Definition
Uses
Characteristics
Classification
Problems
Methods
Value index numbers
Chain base index
Fixed base index
Base conversion
INTRODUCTION
A simple index number measures the
relative change in one or more than
one variable.
An index number measures the relative
change in price, quantity, value, or
some other item of interest from one
time period to another.
.
WHAT IS AN INDEX NUMBER
An index number measures how much
a variable changes over time.
We calculate the index number by
finding the ratio of the current value to
a base value.
USES OF INDEX NUMBERS
To
simplify complexities.
Helpful
Useful
in Business.
Helpful
To
in comparison.
in Predictions.
measure purchasing power.
CHARACTERISTICS OF INDEX NUMBERS
Index numbers measure the change
in the level of a phenomenon.
Index numbers are specialized
averages.
Index numbers measure the effect of
changes over a period of time.
CLASSIFICATION OF INDEX NUMBERS
Price Index
Quantity Index
Value Index
PROBLEMS RELATED TO INDEX NUMBERS
Selection
Selection
Selection
Selection
Selection
Selection
of
of
of
of
of
of
Items.
Prices.
Base Year.
Weights.
An Average.
An Appropriate Formula.
METHODS OF CONSTRUCTING
INDEX NUMBERS
SIMPLE AGGREGATIVE METHOD
It consists in expressing the
aggregate
price
of
all
commodities in the current year
as a percentage of the aggregate
price in the base year.
p1
P01
P01= Index number of the current year.
P1 = Total of the current years price of
all commodities.
P0 = Total of the base years price of all
commodities.
100
EXAMPLE
From the data given below construct the
index number for the year 2007 on the base
year 2008 in Rajasthan state.
COMMODITIES
UNITS
PRICE (Rs)
2007
Sugar
Quintal
2200
3200
Milk
Quintal
18
20
Oil
Litre
68
71
Wheat
Quintal
900
1000
Clothing
Meter
50
60
PRICE (Rs)
2008
SOLUTION :
COMMODITIES
UNITS
PRICE (Rs)
2007
Sugar
Quintal
2200
3200
Milk
Quintal
18
20
Oil
Litre
68
71
Wheat
Quintal
900
1000
Clothing
Meter
50
60
index Number for
2008-
P01
p0 3236
PRICE (Rs)
2008
4351
4351
100
100 134.45
3236
0
It means the prize in 2008 were 34.45% higher than the
SIMPLE AVERAGE OF RELATIVES METHOD.
The current year price is expressed as a price
relative of the base year price. These price
relatives are then averaged to get the index
number. The average used could be
arithmetic mean, geometric mean or even
p1
median.
p 100
0
P01
N
hen geometric mean is used-
log P01
p1
log p 100
0
EXAMPLE:
From the data given below construct
the index number for the year 2008
taking 2007 as by using arithmetic
mean.
Commodities
Price (2007)
Price (2008)
P
10
10
12
12
SOLUTIONCommodities
Price (2007)
Price (2008)
10
166.7
12
16.67
150.0
10
12
120.0
12
150.0
p1
p 100 603.37
P01 0
120.63
N
5
Price
Relative
p1
=603.37
100
p
0
Weighted Index Numbers
These are those index numbers in which rational weights are
assigned to various chains in an explicit fashion.
(A)Weighted aggregative index numbersThese index numbers are the simple aggregative
type with the fundamental difference that weights
are assigned to the various items included in the
index.
(Dorbish and bowleys method.
(Fishers ideal method.
(Marshall-Edgeworth method.
(
Laspeyres method.
(
Paasche method.
(Kellys method.
LASPEYRES
METHOD
This method was devised by Laspeyres in
1871. In this method the weights are
determined by quantities in the base.
p01
pq
p q
1 0
0 0
100
PAASCHES METHOD.
This method was devised by a German
statistician Paasche in 1874. The weights of
current year are used as base year in
constructing the Paasches Index number.
p01
pq
p q
1 1
0
100
DORBISH & BOWLEYS METHOD:
This method is a combination of Laspeyres and
Paasches methods. If we find out the
arithmetic average of Laspeyres and Paasches
index we get the index suggested by Dorbish &
Bowley.
p01
pq pq
p q p q
1 0
1 1
0 0
0 1
100
FISHERS IDEAL INDEX:
Fishers deal index number is the geometric
mean of the Laspeyres and Paasches index
numbers.
P01
pq pq
100
pq pq
1
MARSHALL-EDGEWORTH METHOD:
In this index the numerator consists of an
aggregate of the current years price multiplied
by the weights of both the base year as well as
the current year.
p01
p q p q
p q p q
1 0
1 1
0 0
0 1
100
KELLYS METHOD:
Kelly thinks that a ratio of aggregates with
selected weights (not necessarily of base year
or current year) gives the base index number.
p01
pq
100
p q
1
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.
EXAMPLE:
Given below are the price quantity data,
with price quoted in Rs. per kg and
production in qtls.
Find- (1) Laspeyers Index (2) Paasches
Index (3)Fisher Ideal Index.
PRODUCTION
PRICE
PRODUCTION
15
500
20
600
MUTTON
18
590
23
640
CHICKEN
22
450
24
500
ITEMS
PRICE
BEEF
SOLUTIO
N:
ITEMS
PRICE
PRODUC
TION
PRICE
PRODU
CTION
p1q0 p0 q0 p q p0 q1
1 1
BEEF
15
500
20
600
10000
7500
12000
9000
MUTTON
18
590
23
640
13570
10620
14720
11520
CHICKEN
22
450
24
500
10800
9900
12000
11000
34370
28020
38720
31520
TOTAL
SOLUTION:
1.)Laspeyres index:
p01
pq
p q
1 0
0
34370
100
100 122.66
28020
2.) Paasches Index :
p01
pq
p q
38720
100
100 122.84
31520
1
1 1
0
3.) FISHER IDEAL
INDEX:
P01
pq pq
100
p
q
p
q
34370 38720
100 122.69
28020 31520
WEIGHTED AVERAGE OF PRICE
RELATIVE:
In weighted Average of relative, the price
relatives of the base year price. These price
relatives are multiplied by the respective
weight of items. These products are added up
and divided by the sum of weights.
Weighted arithmetic mean of price relative-
P1
P
100
P0
P01
PV
V
P=Price relative
V=Value weights = 0
p q0
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 indexnumber.
V
p1q1
pq
0
100
CHAIN BASE INDEX NUMBERS
Chain base index is that index number in which the year
immediately preceeding the one is taken as base year.
Steps in construction of Chain base index
1)Computation of link relatives :
Link Relatives = Current Years Price 100
Previous Years Price
2) Conversion of link relatives into chain base index :
Chain Base Index= LR of current year Chain Index of
Previous Year
100
EXAMPLE: CONSTRUCT CHAIN
BASE INDEX
Year
Price
1985
1986
1987
1988
1989
1990
94
98
102
95
98
100
Years
Prices
Link Relatives
Chain Base
Index
1985
94
100
100
98 100 = 104.3
94
104.3 100 =
104.3
100
1986
98
1987
102
102 100 =
104.1
98
104.1 104.3=
108.6
100
1988
95
95 100 = 93.1
102
93.1 108.6 =
101.1
100
1989
98
98 100 = 103.2
95
103.2 101.1=
104.3
100
1990
100
100 100 = 102
98
102 104.3=
106.4
FIXED BASE INDEX NUMBERS
In Fixed base index, the base year remains fixed.
For example: We take 1990 as base year for 1991
and1992.
Steps in construction of Fixed Base Index :
1) Computation of Price Relatives
Price Relatives = Current Years Price 100
Base Years Price
Example: Calculate Chain Base Index
Year Index.
199 199 199 199 199 199 199
and Fixed
Price
31
22
28
24
30
27
25
Solution :
Year
Price
Link
relatives
CBI
FBI
1992
31
100
100
100
1993
22
70.96
70.96
70.96
1994
28
127.27
90.30
90.3
1995
24
85.71
77.40
77.4
1996
30
125.00
96.75
96.77
1997
27
90.00
87.07
87.09
1998
25
92.59
80.61
80.64
BASE CONVERSION
1) Conversion of CBI into FBI
Current Years FBI =Current
years
CBIPrevious Years FBI
100
2) Conversion of FBI into CBI
Current Years CBI =
Current Years
FBI 100
Previous
Years FBI
THANK YOU
