Chapter 5:Index Numbers

Unweighted index
1) Simple Index Numbers

• If the index number is used to measure the relative change in just one
variable, such as hourly wages in manufacturing, we refer to this as a
simple index. The main use of an index number in business is to show
the percent change in one or more items from one time period to
another.
•I=
• I1 = index in the current period
• P1 = Price in the current period (latest)
• P0 = Price in the base period (previous)
Try 2: Table shows the price of three types of food in 2003 and 2008. Find the price relative for each type of
taking 2003 as the base year.

Type of food 2003 price per 2008 price per Simple index
(kg) Po (kg) P1
A 2.00 3.00 3.00/2.00 x 100
= 150
B 4.00 6.80 6.80/4.00 x 100
= 170
C 15.00 20.00 20/15 x 100 =
133.33
• Simple index
•A=
Try 2
• Price of petrol in 2014 and 2015 were RM2.30 and RM2.45
respectively. Taking 2014 as the base year find the price relative index
for 2015.

•I=
Try 3
• Table shows the prices of three types of air conditioned units, A, B
and C in 2015 and 2016 and the price relative in 2016 taking 2015 as
the base year. Find the values of x, y and z.
Price 2015 Po Price 2016 P1 Price relative
A 900 920 X
B 1100 Y 120
C z 1600 110
•X=

• 120 =

• a = 132000/100 = 1320

• 110 =
• 110b = 160000
• B = 1454.54
2) Simple average index I = , Pi = simple
index for each item
• Table shows the country’s average prices of petrol , diesel and cooking gas for 2013, 2014 and 2015.
Using simple average index, compute price index for year i) 2014 with 2013 as the base year.
• Ii)

Item 2013 Po 2014 P1 2015 Simple index

Petrol 1.90 2.30 2.50 2.30/1.90 x
100 = 121.05
Diesel 1.60 2.20 2.40 2.20/1.60 x
100 = 137.5
Cooking gas 1.00 1.20 1.30 120
378.55
I=
• Pi = simple index for each item
• n = number of items
3) Simple aggregative index
• P=

• = 126.67
Weighted index ( t = 1 = n) = current
 ANTONI industry produces electrical components that require
four main raw material. Table shows the price and quantity
required for each material.
Raw material 2006 Price 2006 2008 price 2008 Simple
quantity P1 quantity index
Po Qo Q1

A 4.00 4,000 5.00 3,500 125

B 6.00 2,750 7.00 3,000 116.67
C 5.00 2,000 4.00 3,000 80
D 8.00 1,000 9.00 2,000 112.5
PoQo P1Q1 P1Qo PoQ1

16,000 17500 20,000 14000

       

       

       

50500 68500 56250 63000

• LPI = x 100 =

• LQI =

• PPI = 108.73

• PQI = 121.78
Explanation of (i) 1m
• There is an increase of 11.39% (111.39 – 100) of the price raw
materials between 2006 and 2008.

• Ex: 97.4
• Ex: There is a decrease of 2.6% (100 – 97.4) of price/quantity raw
materials between…2006 to 2008
Fisher’s Ideal Price Index
• = 110.05
Simple average index
• I = = 434.17/4 = 108.54

• simple aggregative index

Ex 2

Po P1
Calculate i) Laspeyres Price Index =

ii) Laspeyres Quantity Index

 
iii) Paasche Price Index
 
iv) Paasche Quantity Index
 
v) simple average index =
 
vi) simple aggregative index =
 
vii) fisher’s ideal price index =

viii) explain your answer for (i) and ((iv)

 

 
Revenue = price x quantity
Q = revenue/ price

Revenue = price x quantity

P = revenue/quantity
Qo Q1 PoQo PoQ1 P1Q1 P1Qo