Chapter 5

INDEX NUMBERS

1
 Recap Index numbers
• An index number measures the relative change in price, quantity,
value, or some other item of interest over time.
simple index :A Simple Index Number measures
the changes in price or quantity of a single item
over time.
composite index : It is a number that measures an
average
price relative
index is anchanges in ameasures
index that group of changes
variablesin
withprices
the respect
of atogroup
a base.
of items over time.
quantity index measures changes over time in the
quantities of items in a ‘basket’.
Value indices measure the combined effects of
price and quantity changes.

2
 Recap Index numbers
STEPS IN CONSTRUCTION OF INDEX
NUMBERS
Selection of commodities for inclusion:
Selection of the base period: base period-a period
from which the changes are measured.
1.Fixed base method
2.Chain base method
Selection of averages the choice of an
appropriate average to get a single index number
for each year.
Selection of appropriate weights
Base year weighting
Current or given year weighting

3
 UNWEIGHTED PRICE INDEX NUMBER
1. Simple Aggregative indices 2. Simple Average
of relatives
1. Simple Aggregative indices
•It indicates the percentage change in the
aggregate prices of a number of commodities, at
different periods.
• It is obtained by dividing the sum of give year
prices of all commodities by the sum of the base
year prices of the same commodities and expressing
the result as a percentage.

Disadvantage:
•Not take into account relative importance of various
commodities.
• the units of prices of commodities being different,
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 UNWEIGHTED PRICE INDEX NUMBER
2. Simple Average of relatives
•A simple average of price relatives is obtained by
taking the average of the price relatives of the
given commodities for each year and expressing as
a percentage.
•If we take the ARITHMETIC MEAN, then we have

Where k is number of commodities.

Disadvantage
oNot take into account relative importance of various
commodities.
othe use of arithmetic mean, which is not an
appropriate average
• This drawback tobe
can use with ratios.
sorted by taking GEOMETRIC
AVERAGE, in which case the formula becomes

5
EXAMPLES
NO: 1
The averages of prices of certain commodities given
below. compute a simple aggregative price index
number for the year 1958 based on 1957 prices.
Prices ( Rs) in
Commodities Units 1957 1958
wheat Ton 351 335
rice Maund 35 32
salt Maund 10 11
sugar Seer 1.25 1.4
cloth Yard 2.25 2.6
milk Seer 0.75 0.85
oil Gallon 1.25 1.35
Sum
sum . 401.50 384.20

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EXAMPLES
NO: 2
Compute price index for the year 1958 based on
1957 using the simple average relatives method
Prices
Prices((Rs)
Rs)in
in
Price
Price
Commodities
Commodities Units
Units 19571957(p0)1958
1958(p1)relatives
relatives
wheat
wheat Ton
Ton 351351 335
335 95.44
rice
rice Maund
Maund 3535 32
32 91.43
salt
salt Maund 1010
Maund 11
11 110.00
sugar
sugar Seer 1.25
Seer 1.25 1.4
1.4 112.00
cloth
cloth Yard 2.25
Yard 2.25 2.6
2.6 115.56
milk
milk Seer 0.75
Seer 0.75 0.85
0.85 113.33
oil
oil Gallon 1.25
Gallon 1.25 1.35
1.35 108.00
total
total .... .. .. .... 746

It should be noted that the index numbers obtained by the two

methods are considerably different. This is because the simple
aggregative index has been affected by the units of prices of
commodities. 7
EXAMPLES
NO: 3
From the data given below, compute the index
numbers of prices, taking 1962 as base. Use (i)
simple average of price relatives
year anddrinks
firewood (ii) theoil median
matches
of price
Find relatives.
price relative 1962 3.25 2.50 0.20 0.06
1963 3.44 2.80 0.22 0.06
first.
1964 3.50 2.00 0.25 0.06
1965 3.75 2.50 0.25 0.06
Price relatives
Relatives index number
index by by
number
year
year firewood drinks matches (i)(i)Mean
drinks oil oil matches Mean (ii)Median
(ii)Median
1962 100 100 100 100 100 100
1963
1963 106 112 110 100 107 108
1964
1964 108 80 125 100 103 104
1965 115 100 125 100 110 108

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 EXAMPLES
NO: 4
Construct chain indices for the following years,
taking 1940 as the base and the simple average of
relatives
year wheat rice maize
1940 2.80 10.50 2.70 To find chain indices we first
1941 3.40 10.80 3.20 have to find link relatives.
1942 3.60 10.60 3.50
1943 4.00 11.00 3.80
1944 4.20 11.50 4.00

Link relatives
Link
Linkrelatives
relatives
year wheat rice maize simple avg of relative chain indices
year
year wheat
wheat rice
rice maize
maize simple
simpleavg
avgofofrelative
relative chain
chainindices
indices
1940 100 100 100100
1940
1940 100
100 100
100 100100
100 100.0
1941 (3.40/2.8)*100 = 121 103 119(121+103+119)/3=114
1941
1941 (3.40/2.8)*100
(3.40/2.8)*100==121
121 103
103 119(121+103+119)/3=114
119 (114*100)/100= 114
1942 (3.60/3.40)*100= 106 98 109(106+98+109)/3=104
1942
1942 (3.60/3.40)*100=
(3.60/3.40)*100=106106 98
98 109(106+98+109)/3=104
109 (114*104)/100=118.6
1943 (4/3.60)*100 = 111 104 109(111+104+109)/3=108
1943
1943 (4/3.60)*100
(4/3.60)*100==111
111 104
104 109(111+104+109)/3=108
109 (108*118.6)/100=128.1
1944 (4.2/4)*100 = 105 105 105(105+105+105)/3=105
1944
1944 (4.2/4)*100
(4.2/4)*100==105
105 105
105 105(105+105+105)/3=105
105 (128.1*105)/100=134.5

NOTE: Chain index for a given year= link relative for that year* chain
index of previous year
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EXAMPLES
NO: 6
Construct chain indices for the following prices using
simple geometric of relatives for each year.
year A B C D
1951 81 77 119 55
1952 62 54 128 82
1953 104 87 111 100
1954 93 75 154 96
1955 60 43 165 88

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 WEIGHTED PRICE INDEX NUMBER
An index number that take into account the relative
importance (i.e. weight) of the commodities is
called weighted index number.
1.Weighted Aggregative indices
2. Weighted Average of relatives

1. Weighted Aggregative indices

•The ratio of the sum of weighted prices of current
and base time periods multiplied by 100 is called
weighted aggregate price index.
There are various kinds of Weighted Aggregative
indices
1.Laspeyres’ Price index
2.Paasche’s Price Index
3.Marshall-Edgworth Price Index
4.Fisher’s Ideal Index
11
WEIGHTED PRICE INDEX NUMBER (1. weighted Aggregative
indices)
1. Laspeyres’ Price index/ Base year weight
method
• Percentage ratio of the aggregate of the given period
prices weighted by the base year quantities to the
aggregate of base period prices weighted by the base
quantities.
• The base year quantities are taken as weight.
• Laspeyre’s index tend to have upward bias (it inflate
index value as the series move away from the base
2. period)
Paasche’s Price Index/Given or current year
method
• Percentage ratio of the aggregate of the given period
prices weighted by the given year quantities to the
aggregate of base period prices weighted by the
given year quantities.
• Paasche’s index tend to have downward bias (it
deflate index value of distant periods of time.)
12
WEIGHTED PRICE INDEX NUMBER (1. weighted Aggregative
indices)
3. Marshall-Edgworth Price Index
• Average of quantities in base and given/current
period is taken as weights
• it is the index which has no general bias in either
direction.

4. Fisher’s Ideal Index/ crossed weight formula

• It is the geometric mean of the Laspeyre’s and
Paasche index numbers.

5. Walsh Index
• Use geometric mean of the base and current year
quantities as weight.

13
EXAMPLES
NO: 1
From the following table, compute the weighted
aggregative price index for 1979 on the basis of the
year 1975. consumption prices in Rs
commodity q0(1975)
consumptionP0(1975) prices
P1(1979)
in Rs p1*q0 p0*q0
milk
commodity 30
1975 3.5
1975 4 1979 120 105
flour
milk 25
30 1.243.5 1.75 4 43.75 31
flour
cloth 25
12 1.24
4 8 1.75 96 48
cloth
tea 12
1 12 4 18 8 18 12
tea
ghee
ghee 51
5 7.512
7.5 4 18
4 20 37.5
ghee
eggs
eggs 45
4 57.5
5 7.25
7.25 4 29 20
eggs
Sum .. 4.. ..5 7.25
Sum .. .. .. 326.75 253.5

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EXAMPLES
NO: 2a Construct the following weighted
aggregative price index numbers for 1961 and 1962
for the given data. (i) Laspeyre’s (ii) Paasche's (iii)
Fisher's (iv) Marshall-Edgworth
price and (v) Walsh
Quantities
indices 1956 1960 1961 1956 1960 1961
commodity p0 p1 p2 q0 q1 q2
A 64 75 80 270 276 290
B 40 45 41 124 118 144
C 18 21 20 130 121 137
D 58 68 56 185 267 355
1. Laspeyres’ 4. Fisher’s Ideal Index
Price index

2. Paasche’s Price 4. Marshall-Edgworth Price

Index Index

5. Walsh Index
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 WEIGHTED PRICE INDEX NUMBER
2. Weighted Average of Relatives
•It is computed by multiplying each price relative by
its weight, summing these products and dividing by
the sum of the weights.
•The weightsindex
Laspeyres’ are the total values
number: of therelatives are
The price
commodities.
weighted by the total value of commodities in base
year.

Paasche’s index number: The price relatives are

weighted by the total value of commodities in the
given year at base year prices.

Palgrave's index number: The price relatives are

weighted by the total value of commodities in the
given year.

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 WEIGHTED PRICE INDICES: (2.weighted average of
EXAMPLES relatives)
Using following data compute the weighted average of
relative price for 1964 by i) Laspeyres (ii) Paasche's and (iii)
Palgrave’s method.
prices quantities
commodity
1960(p0) 1964(p1) 1960(q0) 1961(q1)
A 3.95 4.25 9675 10436
B 34.8 38.94 78 83
C 61.56 59.7 118 116
weights weighted price relatives
commo price relative
dity (p1/p0) poqo poq1 p1q1 (p1/p0)*poq0 (p1/p0)*poq1 (p1/p0)*p1q1
A 1.076 38216.25 41222.2 44353 41120.69 44355.0872 47723.828
B 1.119 2714.4 2888.4 3232.02 3037.41 3232.1196 3616.63038
C 0.970 7264.08 7140.96 6925.2 7046.16 6926.7312 6717.444
total .. 48194.73 51251.56 54510.22 51204.26 54513.94 58057.90

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 QUANTITY INDEX NUMBERS
• They are intended to measure the changes in the
physical volume or quantity produced, consumed
sold of certain goods or services with respect to
time.
• These index numbers are also called the “Volume
index numbers” or ‘Quantum index numbers”.
• Like a price relative, we define a quantity by the
ratio.
1. Laspeyres’ weighted aggregative quantity
index number:
•Base year prices are kept fixed as weights.

2. Paasche’s aggregative quantity index

number:
•Given year prices are kept fixed as weights.
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 QUANTITY INDEX NUMBERS
3. Fisher’s aggregative quantity index
number:

In a similar way, a weighted relative quantity-

index is defined as

where (qn/qo) are quantity relatives and w

denotes the weights.
1. Laspeyres’ weighted relative quantity-index
: The quantity relatives are weighted by the total
value of commodities in base year.

2. Paasche’s weighted relative quantity-

index : The price relatives are weighted by the
total value of commodities in the base year at
current year prices.
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 VALUE INDEX NUMBERS
• When the price “p” of a commodity during a
period is multiplied by its quantity “q”, produced
or sold during the period, we get the total value,
denoted by pq or v.

It is interesting to note that (omitting the factor

100) a value relative is equal to the product of the
price relative an the quantity relative.

20
EXAMPLES
NO: 1
Construct (i) a Laspeyres' type (ii) a Paasche's type
and (iii) Fisher's Ideal quantity index numbers.
quantity price
commodity
1958(q0) 1959(q1) 1960(q2) 1958(p0) 1959(p1) 1960(p2)
FOR 1960
chair 200 350 350 15 16 20
Desk 100 220 340 18 20 25 Laspeyres’=
Radio 30 45 50 100 120 150 209.9
Paasches=2
commodity q0p0
commodity q0p0 q1p0 q1p1
q1p0 q1p1 q0p1 q2p0
q0p1 q2p0 q2p2
q2p2 q0p2
q0p2 09.1
chair
chair 3000 5250
3000 5250 5600 3200
5600 3200 5250 7000 4000
Desk
Desk 1800 3960
1800 3960 4400 2000
4400 2000 6120 8500 2500 Fisher’s=20
Radio
Radio 3000 4500
3000 4500 5400 3600
5400 3600 5000 7500 4500 9.5
total
total 7800 13710
7800 13710 15400
15400 8800
8800 16370 23000 11000

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 EXAMPLES
NO: 2
Given the following data calculate the (i) value index number; (ii)
Laspeyres' weighted aggregative price index and (iii) Paasche's
weighted average
BaseBase
year ofyear
year Current relatives
Current year volume index.
Calculations
Comm
Comm
odity (q1/q0)*q0
odityP0 P0 q0 q0 p1 p1 q1 q1 P0q0 p1q1 p1q0 p0q1 q1/q0
p1
A A80.65
80.65276276 85 85 29029022259.4 24650 23460 23388.5 1.050725 24650
B B 155155 18 18154.75
154.75 44 44 2790 6809 2785.5 6820 2.444444 6809
C C 32.532.5121121 30.530.5 137137 3932.5 4178.5 3690.5 4452.5 1.132231 4178.5
D D 75 75 26726760.95 60.95 355355 20025 21637.25 16273.65 26625 1.329588 21637.25
total
total 49006.9 57274.75 46209.65 61286 .. 57274.75
i) value index number

(ii) Laspeyres' weighted aggregative

price index

(iii) Paasche's weighted average of relatives

volume index.
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Assignment 3
Calculate the following indices for 1963 ( 1953 is
base year)
1.Weighted Aggregative price indices
•Laspeyres’ Price index
•Marshall-Edgworth Price Index,
• Walsh Index
2.Weighted Average of Price Relatives
•Laspeyres’ Price index
•Paasche
•Palgrave's index number
PRICE QUANTITY
COMMODITIES
1953 1963 1953 1963
A 12 10 501 600
B 38 50 100 194
C 40 40 56 76

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