INDEX NUMBERS

What is an INDEX NUMBER?

• A statistical measure designed to show changes in a variable or group

of related variables (price, quantity, value) with respect to time,
geographic location, or other characteristics such as income,
profession, and the like.
 PRICE, QUANTITY, VALUE
RELATIVES
• These are the simplest kind of index numbers:
• PR
• QR
• VR
• They compare the price of ONLY ONE commodity between two time
periods or localities.
 Example 1

• The price of a commodity in 2012 and 2013 were P2.00 and P2.40,
respectively. Taking 2012 as the base year and 2013 as the given
year, find the price relative and interpret the result.
 Solution

• Given:
• 2012 = base year
• 2013 = given year
• Therefore:
• Po = P2.00
• Pn = P2.40
• Substituting values to the formula:

• PR = Pn/Po
• PR = P2.40/P2.00
• PR = 1.2
• Multiply result by 100 to change the figure to percent: 120%
• Drop the percent sign to finally arrive at the final index number:
120
• Summary:
• Year Price Relative
• 2012 100
• 2013 120

• Interpretation:
• 120 – 100 = 20
• 20%
• The price of the commodity rose/increased by 20% from 2012 to
2013.
 Example 2

• Given:
• Price in 2012 = P2.40
• Price in 2013 = P2.00
• Find the PR if 2012 is the base year. Interpret the result.
 Solution

• PR = Pn/Po
• PR = P2.00/P2.40
• PR = 0.833
• 0.833 X 100 = 83.3
• Interpretation:
• 100 – 83.3 = 16.7 or 16.7%
• The price of the commodity decreased by 16.7% from 2012 to 2013.
 Base Year

 It is the year with which variables (in the previous

examples is Price) during a given year are being
compared.
 A.k.a. Reference Year, that is, we refer prices (in
2013) back to that year (2012).
 What major factor is considered when choosing a
base year?
 That year must be a “normal” or a “typical” year.
 That year should not be too far back in the past.
 Price Index Numbers

 3 Types of P.I.N.
1) Price Relative
2) Unweighted Price Index
* Simple Aggregative Price Index (SAPI)
* Average of Price Relatives (APR)
3) Weighted Price Index
* Laspeyres Price Index
* Paasche Price Index
 UNWEIGHTED PRICE INDEX

Commodity 1978 1981

(PhP) (PhP)
A O.10/pound 0.15/pound
B 2.00/picul 1.50/picul
C 0.80/liter 1.00/liter
D 0.20/dozen 0.25/dozen

SAPI = ∑Pn/∑Po
 Solution
 SAPI = ∑Pn/∑Po
 SAPI = 0.15 + 1.50 + 1.00 + 0.25
0.10 + 2.00 + 0.80 + 0.20
 SAPI = 2.90
3.10
 SAPI = 0.935 or 0.94
 SAPI = 0.94 x 100 (if it is to be converted into
an index number)
SAPI = 94
 Interpretation

• The prices of commodities A, B, C, and D taken together decreased

by 6% from 1978 to 1981.
 UNWEIGHTED PRICE INDEX

Commodity 1978 1981

(PhP) (PhP)
A O.10/pound 0.15/pound
B 2.00/picul 1.50/picul
C 0.80/liter 1.00/liter
D 0.20/dozen 0.25/dozen
3.10 2.90

SAPI = ∑Pn/∑Po
SAPI = (P2.90/P3.10) 100
SAPI = (0.935) 100
SAPI = 94
 Average of Price Relatives

• Compute the PR for each commodity

• Get the sum of the PRs and divide it by the total number of
commodities.
 Given:
Commodity 1978 1978 1981 1981
(PhP) (Qty.) (PhP) (Qty.)
A O.10/pound 80 pounds 0.15/pound 200 pounds
B 2.00/picul 10 piculs 1.50/picul 5 piculs
C 0.80/liter 50 liters 1.00/liter 75 liters
D 0.20/dozen 100 dozens 0.25/dozen 100 dozens
 Solution
COMMODITY Pn/Po PR (X 100)
A 0.15/0.10 150
B 1.50/2.00 75
C 1.00/0.80 125
D 0.25/0.20 125
475

APR = 475/4
APR = 118.75

Interpretation:

The prices of commodities A, B, C, and D taken together increased by

18.75% from 1978 to 1981.
 Weighted Price Index

• Laspeyres Price Index = ∑(PnQo)

∑(PoQo)

• Paasche Price Index = ∑(PnQn)

∑(PoQn)
 Solution:

Po Qo Pn Qn PoQo PnQo PoQn PnQn

∑(PoQo) ∑(PnQo) ∑(PoQn) ∑(PnQn)

 Po Qo Pn Qn PoQo PnQo PoQn PnQn
(PhP) (PhP)
0.10 80 0.15 200 P8.00 P12.00 P20.00 P30.00
2.00 10 1.50 5 20.00 15.00 10.00 7.50
0.80 50 1.00 75 40.00 50.00 60.00 75.00
0.20 100 0.25 100 20.00 25.00 20.00 25.00
P88.00 P102.00 P110.00 P137.50
∑(PoQo) ∑(PnQo) ∑(PoQn) ∑(PnQn)

 LPI = (P102/P88) 100

= 116
 PPI = (P137.50/P110) 100
= 125
 INTERPRETATION

• LPI of 116: The bill of goods purchased in 1978 costs 16% more using
1981 prices and 1978 quantities, that is, price rose by 16%.

• PPI of 125: The bill of goods purchased in 1981 costs 25% more than
the same bill of goods purchased in 1978 using 1981 quantities.
 Difference in Interpretation

• LPI: we want to know how much the bill of goods in 1978 will cost in
1981. (we look from the past to the present)

• PPI: we want to know how much the bill of goods in 1981 would
have cost in 1978. (we look from the present to the past)
 Compute the LPI for Year 1 to Year 4 using
Year 1 quantities as base.
P1 Q1 P2 Q2 P3 Q3 P4 Q4
ITEM

A 2 10,000 2.2 11,000 2.45 12,000 2.7 13,000

B 1.25 15,000 1.5 17,250 1.6 19,800 1.7 20,500

C 2.5 8,500 2.85 8,500 3.3 8,500 3.85 8,500

D 1 25,000 1.25 26,000 1.6 28,000 2 31,000

E 10 2,500 12 3,000 15 3,100 19.5 3,200