INDEX NUMBERS

PRESENTED BYP
Deepak Khandelwal
Prakash Gupta
 CONTENTS
Introduction
Definition
Characteristics
Uses
Problems
Classification
Methods
Value index numbers
Chain index numbers.
 INTRODUCTION

An index number measures the relative change

in price, quantity, value, or some other item of
interest from one time period to another.

A simple index number measures the relative

change in one or more than one variable.
WHAT IS AN INDEX NUMBER
 DEFINITION

“Index numbers are quantitative measures of

growth of prices, production, inventory and
other quantities of economic interest.”

Ronold
CHARACTERISTICS OF INDEX NUMBERS
Index numbers are specialised averages.

Index numbers measure the change in the level

of a phenomenon.

Index numbers measure the effect of changes

over a period of time.
 USES OF INDEX NUMBERS

o To framing suitable policies.

o They reveal trends and tendencies.

o Index numbers are very useful in deflating.

PROBLEMS RELATED TO INDEX NUMBERS

Choice of the base period.

Choice of an average.

Choice of index.

Selection of commodities.

Data collection.
CLASSIFICATION OF INDEX NUMBERS
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.

∑ pp 1

=∑ × 100
0

p0 = Total of the current year’s price of all commodities.

= Total of the base year’s price of all commodities.
EXAMPLE:

FROM THE DATA GIVEN BELOW CONSTRUCT

THE INDEX NUMBER FOR THE YEAR 2007 ON
THE BASE YEAR 2008 IN RAJASTHAN STATE.

PRICE (Rs) PRICE (Rs)

COMMODITIES UNITS 2007 2008
Sugar Quintal 2200 3200

Milk Quintal 18 20

Oil Litre 68 71

Wheat Quintal 900 1000

Clothing Meter 50 60
 SOLUTION:
PRICE (Rs) PRICE (Rs)
COMMODITIES UNITS 2007 2008
Sugar Quintal 2200 3200
Milk Quintal 18 20
Oil Litre 68 71
Wheat Quintal 900 1000
Clothing Meter 50 60
∑p =3236
0 ∑p =4351
1

Index Number for 2008-

∑ pp 100 4351
P =
01
× =
1 × 100 = 134.45
∑ 0
3236

It means the prize in 2008 were 34.45% higher than the previous
year.
 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 median.
p1 ×
∑ p 100
P 0
01
=
N
Where N is Numbers Of items.
When geometric mean is used-
log p
∑ pN1 ×100
log 0
P01 =
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 6 10

Q 2 2

R 4 6

S 10 12

T 8 12
 45 16.67
pp
P Pr
Q 12 26 100
150.0
1
0 SOLUTION
603.37
= =
N Index number using arithmetic mean
Comm odities ice (2007) Price (2008) Price Rela tive
p
1 ×
p0
6 10 166.7

R
S 10 12 120.0
T 8 12 150.0
1

∑ 0
p ×100 =603.37
p

∑ p1
p × 100
0 = 120.63
 WEIGHTED INDEX NUMBERS
These are those index numbers in which rational weights
are assigned to various chains in an explicit fashion.

(C)Weighted aggregative index numbers

These 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 bowley’s method.
Fisher’s ideal method.
MarshallEdgeworth method.
Laspeyres method.
Paasche method.
Kelly’s method.
LASPEYRES METHODL
This method was devised by Laspeyres in 1871. In
this method the weights are determined by quantities
in the base.
∑
p 100
10= pq ×
∑ 00

Paasche’s 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 Paasche’s Index number.

p ∑ 100
01 = pq ×
∑ 10
DORBISH & BOWLEYS METHOD.
This method is a combination of Laspeyre’s and
Paasche’s methods. If we find out the arithmetic
average of Laspeyre’s and Paasche’s index we get the
index suggested by Dorbish & Bowley.
∑ 0+ 1

p
∑
∑ pq00 ∑pq 0
Fisher’s Ideal Index.
10
= 1
× 100
Fisher’s deal index number is2 the geometric mean of
the Laspeyre’s and Paasche’s index numbers.

P ×100

1 0 1 1
10
=
∑∑pq× 0
pq
 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.
+
=
∑ pq
1 0
+
∑ pq
1 1 ×
p 01 100
∑ 0 ∑ 1

Kelly’s Method.
Kelly thinks that a ratio of aggregates with selected weights
(not necessarily of base year or current year) gives the
base index number.
∑ pq1 0
p pq 100
1 =∑ × 0

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) Paasche’s Index
(3)Fisher Ideal Index.

2002 2007
ITEMS PRICE PRODUCTION PRICE PRODUCTION

BEEF 15 500 20 600

MUTTON 18 590 23 640

CHICKEN 22 450 24 500

 SOLUTION

ITEMS PRICE PRODUC PRICE PRODU

(p0) (p1) ( 0 )
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

TOTAL 34370 28020 38720 31520

 SOLUTION
1.Laspeyres index:
∑pq1 0 100 34370 100 122.66
p =
10 pq × = × =
∑ 00 02082
2. Paasche’s Index :

∑pq 1 1 02783
p = pq × 001 = × 001 = 48.221
10
∑ 10 02513

3. Fisher Ideal Index

pq1 1
P01 1 0
×100 = 100 122.69
0 0 0 1
=
∑
∑pq
pq× pq 28020 31520× =
 WEIGHTED AVERAGE OF PRICE
RELATIVE
In weighted Average of relative, the price relatives for
the current year are calculated on the basis 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

PV
P01 =
V
P
Where- P
P= 1 ×100
0

P=Price relative
V=Value weights= 0
 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 index number.

∑ pq
V= ×100
pq0 0
∑
11
 CHAIN INDEX NUMBERS
When this method is used the comparisons are not
made with a fixed base, rather the base changes
from year to year. For example, for 2007,2006 will be
the base; for 2006, 2005 will be the same and so on.

Chain index for current year

Average link relative of current year×Chain index of previous year

=
100
EXAMPLE
From the data given below construct an index
number by chain base method.
Price of a commodity from 2006 to 2008.

YEAR PRICE

2006 50
2007 60

2008 65
 SOLUTION
RELATIVE
100
100

YEAR PRICE LINK CHAIN INDEX

(BASE 2006)

2006 50 100 100

2007 60
60 ×100=120 120×100 =
120
50

2008 65
65 ×100=108 108×120 =
129.60
60
 REFERENCES
1. Statistics for management.
Richard i. Levin & David S. Rubin.

2. Statistics for Business and economics.

R.P.Hooda.

3. Business Statistics.
B.M.Agarwal.

4. Business statistics.
S.P.Gupta.