TEST OF A GOOD INDEX

NUMBER

Irwing fisher has suggested two test of

Adequacy of an index number formula:

1.Time reversal test

2. Factor reversal test
 Time reversal test was developed by
IRWING FISHER from the view point that an
index number should work both ways
(backward and forward )with respect to time.
 Let,
p01 = index no. of year 1 , taking base 0
p10 = index no. of year 0, taking base 1

If p01 × p10 = 1 ,

Then the formula for time reversal is

satisfied .
 Test reversal test is satisfied with
the following:
1. Fisher formula =
∑p₁q₀ ∑p₁q₁

P01 = ∑p₀q₀ ∑p₀q₁

∑p₀q₀ ∑p₀q₁
P10 =
∑p₁q₀ ∑p₁q₁
 p₀₁ x p₁₀ =1
2. Simple geometric mean of relative
3. Weighted aggregative with fixed weights.
4. Weighted geometric mean of relative with fixed
weight.
5. Marshall – edgeworth’s formula:

∑p1q0 + ∑p1q1 ∑p0q0 + ∑p0q1

P01 = --------------------------------------------------------------------------------------------------------------- , P10 = -------------------------------

∑p0q0 + ∑p0q1 ∑ p1q0 + ∑p1q1

p₀₁ x p₁₀ =1
 Time reversal test is not satisfied by:
1. laspeyre’s formula : P01 = ∑p1q0 , P10 = ∑p0q1
∑p0q0 ∑p1q1

P01 × P10 ≠ 1

2. Paashe’s formula :
P01 = ∑p1q1 / ∑p0q1
P10 = ∑p0q0 / ∑p1q0

P01 × P10 ≠ 1
Example : contruct index number from the
following data by using Fisher’s formula
and prove time reversal test :
Commoditi P0 (Rs.) P1 (Rs.)
es q₀ (Kg) q₁ (Kg)

A 6 50 10 56

B 2 100 2 120

C 4 60 6 60

D 10 30 12 24

E 8 40 12 36
 SOLUTION
commodities P0 q₀ P1 q₁ p₀q₀ P₁q₀ P0q₁ p₁q₁
A 6 50 10 56 300 500 336 560
B 2 100 2 120 200 200 240 240
C 4 60 6 60 240 360 240 360
D 10 30 12 24 300 360 240 288
E 8 40 12 36 320 480 288 432
TOTAL -- -- -- -- = 1360 = 1900 = 1344 = 1880
P01 = ∑p₁q₀ ∑p₁q₁ x 100

∑p₀q₀ ∑p₀q₁

= √ 1900/1360 x 1880/1344 x 100

= √ 1.397 x 1.399 x 100

= √ 1.4 x 1.4 x 100 = 1.4 x 100 = 140
p10 = ∑p0q1 × ∑ p0q0
∑ p₁q₁ × ∑p₀q₁

= 1344 / 1880 × 1360/ 1900 × 100

= 0.71 × 0.72 × 100 = 71.5

= 1.4 × 0.71 (neglecting the factor 100)

=1
 FACTOR REVERSAL TEST
Irwing fisher extend the logical property

price × quantity = value

when prices and quantity are interchanged in

the price index formula we get quantity index
formula when mutiplied by price index it should
given the value index by omitting the factor 100.
p01= price index for year 1 with year 0 as base.

q01 = quantity index for year 1 with year 0 as base

V01 = value index for year 1 with year 0 as base.

p01 × q01 = v01

P01 = ∑p₁q₀ × ∑p₁q₁

∑p₀q₀ × ∑p₀q₁
changing p to q , q to p , we have
q01 = ∑q1p0 × ∑ q1p1
∑q0p0 ∑ q0p1
p01 × q10= ∑p₁q₀ × ∑p₁q₁ ∑q1p0 × ∑q1p1
∑p₀q₀× ∑p₀q₁ ∑q0p0 × ∑q0p1

= ∑p₁q₁ × ∑q1p1 = ∑p₁q₁

∑p₀q₀ × ∑q0p0 ∑p₀q₀
= v 01
 Construct index number by using fisher’s
ideal formula and show how it satisfies factor
reversal test.

commodities p₀ q₀ p₁ q₁

A 6 50 10 56

B 2 100 2 120

C 4 60 6 60

D 10 30 12 24

E 8 40 12 36
ITEM p₀ q₀ p₁ q₁

A 6 50 10 56 300 560 336 500

B 2 100 2 120 200 240 240 200

C 4 60 6 60 240 360 240 360

D 10 30 12 24 300 288 240 360

E 8 40 12 36 320 432 288 480

TOTAL 1360 1880 1344 1900

Fisher’s ideal index number,

p01= 1900 /1360 × 1880 / 1344 ×100

= 139.79

q01 = 1344 / 1360 × 1880 × 1900 ×100

= 98.88
value index number, V01= ∑p₁q₁
∑p₀q₀
 V01 = 1880 / 1900 × 100
= 138.24
Factor reversal test is satisfied if
p01 × q01 = v01 × 100 subtituting the
values, we have
= 139.79 × 98.88 = 138.24 × 100
= 138.22 × 100 = 138.24 × 100
L.H.S = R.H.S
Hence , we conclude that fisher’s formula
satisfies factor reversal test….
Thank you