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MIT First Grade College

Manandavadi Road, Mysore-08


Affiliated to University of Mysore

VISION OF THE INSTITUTE

Empower the individuals and society at large through educational excellence; sensitize them for
a life dedicated to the service of fellow human beings and mother land.

MISSION OF THE INSTITUTE

To impact holistic education that enables the students to become socially responsive and useful,
with roots firm on traditional and cultural values; and to hone their skills to accept challenges
and respond to opportunities in a global scenario.

Lecture Notes on: QUANTITATIVE DECISION TOOLS

Prepared by: KAVANA.N

Department: COMMERCE AND MANAGEMENT

Subject code: BM5SQDT

QUANTITAIVE DECISION TOOLS

C01-Explain the concept of statistics and evaluate the assumptions of statistical tools.

C02-Calculate and interpret statistical values by using the correlation and regression analysis.

C03-Construct the unweighted and weighted price index number and test for an Index number.

C04-Analyse and Interpret hypothesis tests for a single population proportion

C05-Demonstrate the ability to apply using the statistical tools to solve the business problems.

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SYLLABUS
UNIT - 1- Meaning and definition of statistics, functions, advantages, limitations collection of
data - methods of collecting primary data, and sources of secondary data - classification and
tabulation - SPSS / EXCEL -Introduction, uses, creation of variables and entering data.

UNIT 2- Measures of central tendency - Averages of Arithmetic Meaning, Median, Mode /


Grouping Method], Standard Deviation, Calculation of Mean, Median and Standard Deviation
Using SPSS / EXCEL.

UNIT - 3 - Correlation - Meaning and Definition, Types of Correlation, Methods of Calculating


Correlation Coefficients Using the Correlation of Karlpearsons and Spearman‟s Correlation
SPSS / EXCEL

UNIT- 4 - Regression - Meaning and Definition, Distinction between Correlation and


Regression, Regression Equations and SPSS using Regression of Estimations Calculation.

UNIT - 5 - Index Numbers - Definition Types - Methods of Construction and Problems in


Construction - Cost of living index numbers. Note - Besides solving problems chapter - Wise in
class rooms, teaching using SPSS / EXCEL

UNIT - 6 - Hypothesis of Testing: Hypothesis of Meaning, Types of Hypotheses, Test of


Significance Procedure of Testing Hypothesis - Z test, One sample test, t- test, Chi square test
Reference Text books:

1. Fundamentals of Statistics: DN Elhance, Veena Elhance and BM Aggarwal


2. Statistical Methods: S. P Gupta.
3. Fundamentals of Statistics: S.C Gupta
4. Practical Statistics: R S N Pillai and Bhagavathi
5. Statistics (Theory, Methods and Application): D.C. Sancheti and V.K. Kapoor
6. Statistics for Management: Richard L. Levin and David S. Rubin

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TABLE OF CONTENTS
SL. NO. TOPIC PAGE NO.
1 Introduction to statistics 4-11

2 Measures of central tendency 12-14

3 Correlation & Regression 15-16

4 Index Numbers 17-20

5 Hypothesis of Testing 21-23

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UNIT-1

INTRODUCTION TO STATISTICS

The word statistics is derived from three words , Latin word “ Status” (lecture about state affairs)
, Italian word “ Statista” ( statesman or politician) and German word “ Statistik” ( originally the
analysis of data about the state) all these words represent the same meaning “ POLITICAL
STATE”.

EVOLUTION OF STATISTICS:

In olden days the word statistics is restricted only to Public administration. This was later
extended to collect data on population and property of the state. Generally such data were used to
assess the man power and wealth of the country. Has time advanced statistics become more and
more scientific and now it is applied in almost all the fields.

The Roman Empire was one of the first empires to use the statistics just to analyze the size of the
empire‟s population, geographical area and wealth. During the 20th century several
mathematicians gave their contribution to the development of new methods, theories and
application of statistics. Now a day the availability of electronic computers is certainly a major
factor in the modern development of statistics.

The famous mathematicians who contributed for the development of statistics are De-moire,
Laspeyre‟s Baye‟s , John Tukey, Karl Pearson, Francis Galton, Bowley and Ronald.A.Fisher
etc., among these mathematicians Sir Ronald.A. Fisher is considered as Father of Statistics.

DEFINITION:
A.L. Bowley defines statistics has “Science of Averages” later he redefined it has “Science of
Counting” .

Croxten and Cowden define statistics has “Science of Collection, organization , Presentation,
Analysis and Interpretation of numerical data”. This is the best definition of statistics and
according to this definition any statistical investigation has 5 important stages they are:

Collection : While collecting the numerical information at most care should be given to collect
the data. So that there won‟t be any inconsistent and irrelevant information.

Organization : The collected should be organized in a systematic manner it involves two steps-
Editing and classification

 Editing : If there are any mistakes in the collected information . It should be


rectify and corrected. This process is called Editing.

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 Classification : The edited information should be grouped according to similar
characteristics this is called classification.

Presentation : After organization the next step is presentation of data. It can be done either by
using tables or diagrams or graphs.

Analysis : After presenting data it should be analyze by using sampling techniques such as
measures of central tendency, measures of dispersion, skewness etc.

Interpretation : The final stage in any statistical investigation is giving interpretation (final
result or conclusion).

CHARACTERISTICS OF STATISTICS:
1. Statistics are aggregates of facts: Single and isolated figures are not statistics because they
cannot be compared and no meaningful conclusion can be drawn from it. It is the only aggregate
of facts capable of offering some meaningful conclusion that constitute statistics.
(All statistics are expressed in numbers but all numbers are not statistics)

2. Statistics must be numerically expressed: Statistical methods are applicable only to those
data which can be numerically expressed. Qualitative expressions like honesty, intelligence,
sincere are not statistics unless they can be numerically expressed.

3. Statistics should be capable of being related to each other: Statistical data should be
capable of comparison and connected to each other. If there is no apparent relationship between
the data they cannot be called statistics.

4. Statistics should be collected in a systematic manner: For collecting statistical data a


suitable plan should be prepared and work should be done accordingly.

5. Statistics should be collected for a definite purpose: The purpose of collecting data must be
decided in advance. The purpose should be specific and well defined.

6. Statistics are affected to a marked extent by a large number of causes: Facts and figures
are affected to a marked extent by the combined influence of a number of forces.

7. Reasonable standard of accuracy should be maintained in collection of


statistics: Statistics deals with large number of data. Instead of counting each and every item,
Statisticians take a sample and apply the result thus obtained from sample to the whole group.
The degree of accuracy of sample largely depends upon the nature and object of the enquiry. If
reasonable standard of accuracy is not maintained, numbers may give misleading result.

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FUNCTIONS OF STATISTICS:

1. To Present Facts in Definite Form:


We can represent the things in their true form with the help of figures. Without a statistical study,
our ideas would be vague and indefinite.
The facts are to be given in a definite form. If the results are given in numbers, then they are
more convincing than if the results are expressed on the basis of quality.

2. Precision to the Facts:


The statistics are presented in a definite form so they also help in condensing the data into
important figures.So statistical methods present meaningful information. In other words statistics
helps in simplifying complex data to simple-to make them understandable.

3. Comparisons:
After simplifying the data, it can be correlated as well as compared. The relationship between the
two groups is best represented by certain mathematical quantities like average or coefficients etc.
Comparison is one of the main functions of statistics as the absolute figures convey a very less
meaning.

4. Formulation and Testing of Hypothesis:


These statistical methods help us in formulating and testing the hypothesis or a new theory. With
the help of statistical techniques, we can know the effect of imposing tax on the exports of tea on
the consumption of tea in other countries. The other example could be to study whether credit
squeeze is effective in checking inflation or not.

5. Forecasting:
Statistics is not only concerned with the above functions, but it also predicts the future course of
action of the phenomena. We can make future policies on the basis of estimates made with the
help of Statistics. We can predict the demand for goods in 2005 if we know the population in
2004 on the basis of growth rate of population in past. Similarly a businessman can exploit the
market situation in a successful manner if he knows about the trends in the market. The statistics
help in shaping future policies.

6. Policy Making:
With help of statistics we can frame favourable policies. How much food is required to be
imported in 2007? It depends on the food-production in 2007 and the demand for food in 2007.

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Without knowing these factors we cannot estimate the amount of imports. On the basis of
forecast the government forms the policies about food grains, housing etc. But if the forecasting
is not correct, then the whole set up will be affected.

7. It Enlarges Knowledge:
Whipple rightly remarks that “Statistics enables one to enlarge his horizon”. So when a person
goes through various procedures of statistics, it widens his knowledge pattern. It also widens his
thinking and reasoning power. It also helps him to reach to a rational conclusion.

8. To Measure Uncertainty:

Future is uncertain, but statistics help the various authorities in all the phenomenon of the world
to make correct estimation by taking and analyzing the various data of the part. So the
uncertainty could be decreased. As we have to make a forecast we have also to create trend
behaviors of the past, for which we use techniques like regression, interpolation and time series
analysis.

LIMITATIONS OF STATISTICS:

1. Statistics deals only with quantitative characteristics: Statistics are numerical statements of
facts. Data which cannot be expressed in numbers are incapable of statistical analysis.
Qualitative characteristics like honesty, efficiency, intelligence etc. cannot be studied directly.

2. Statistics deals with aggregates not with individuals: Since statistics deals with aggregates
of facts, the study of individual measurements lies outside the scope of statistics.

3. Statistical laws are not perfectly accurate: Statistics deals with such characteristics which
are affected by multiplicity of causes and it is not possible to study the effect of these factors.
Due to this limitation, the results obtained are not perfectly accurate but only an approximation.

4. Statistical results are only an average: Statistical results reveal only the average behavior.
The Conclusions obtained statistically are not universally true but they are true only under
certain conditions.

5. Statistics is only one of the methods of studying a problem: Statistical tools do not provide
the best solution under all circumstances.

6. Statistics can be misused: The greatest limitation of statistics is that they are liable to be
misused. The data placed to an inexperienced person may reveal wrong results. Only persons
having fundamental knowledge of statistical methods can handle the data properly.

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COLLECTION OF DATA
COOLECTION OF DATA

PRIMARY DATA SECONDARY DATA

PRIMARY DATA:
When the data are collected directly by the researcher for the first time is called as Primary Data.

1. Interview Method: It is the most widely used primary data collection methods wherein the
interviewer asks questions either personally, or through mail or telephone from the respondents
to obtain the insights of the problem under study. The researcher may either visit the respondent
in person at his home or meet him at the central location as mutually decided by them.

And in case, a large group of respondents is to be contacted then the mail and telephone survey
can be used. In the mail survey, the questionnaires are sent to the respondent who is expected to
give answers to the questions via mail. In the case of a telephone survey, the interviewees are
called and asked questions (closed-ended) specific to the research problem.

2. Delphi Technique: It is a forecasting technique wherein the researcher elicits the information
from the panel of experts either personally or through a questionnaire sent through the mail.
Here, each expert in his respective field is asked to give their opinions on the problem concerned
and the consolidated view of all is used to reach for the most accurate answer.

3. Projective Techniques: The projective techniques are the unstructured and an indirect interview
method used where the respondents are reluctant to give answers if the objective is disclosed. In
order to deal with such situation, the respondents are provided with the incomplete stimulus and
are required to complete it through which their underlying motivations, attitudes, opinions,
feelings, etc. related to the concerned issue gets revealed. Some of the following projective
techniques are used to discover the „whys‟ of the market and the consumer behavior:
 Thematic Apperception Test (TAT): Here the respondent is presented with multiple pictures
and then is asked to describe what he thinks the pictures represent.
 Role Playing: Under this method, the respondents are given the imaginary situations and are
asked to enact in a way they would have if the situation is real.
 Cartoon Completion: Here the respondents are shown the cartoon pictures comprising of two
or more characters and then are asked to give their ideas and opinions about the characters.
 Word Association: Here the researcher provides a set of words to the respondent and then ask
them to tell what comes to their mind when they hear a particular word.

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 Sentence Completion: The researcher provides the incomplete sentences to the respondents
and asks them to complete it. This is done to check the ideas of the respondents.
4. Focus Group Interview: It is one of the widely used data collection methods wherein a small
group of people, usually 6-12 members come together to discuss the common areas of the
problem. Here each individual is required to provide his insights on the issue concerned and
reach to a unanimous decision. In this interview, there is a moderator who regulates the
discussion among the group members.

5. Questionnaire Method: Questionnaire is the most evident method of data collection, which is
comprised of a set of questions related to the research problem. This method is very convenient
in case the data are to be collected from the diverse population. It mainly includes the printed set
of questions, either open-ended or closed-ended, which the respondents are required to answer
on the basis of their knowledge and experience with the issue concerned.
SECONDARY DATA
When the data are collected by someone else for a purpose other than the researcher‟s current
project and has already undergone the statistical analysis is called as Secondary Data.
The secondary data are readily available from the other sources and as such, there are no specific
collection methods. The researcher can obtain data from the sources both internal and external to
the organization. The internal sources of secondary data are:

 Sales Report
 Financial Statements
 Customer details, like name, age, contact details, etc.
 Company information
 Reports and feedback from a dealer, retailer, and distributor
 Management information system
There are several external sources from where the secondary data can be collected. These are:

 Government censuses, like the population census, agriculture census, etc.


 Information from other government departments, like social security, tax records, etc.
 Business journals
 Social Books
 Business magazines
 Libraries
 Internet, where wide knowledge about different areas is easily available.

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The secondary data can be both qualitative and quantitative. The qualitative data can be obtained
through newspapers, diaries, interviews, transcripts, etc., while the quantitative data can be
obtained through a survey, financial statements and statistics.

One of the advantages of the secondary data is that it is easily available and hence less time is
required to gather all the relevant information. Also, it is less expensive than the primary data.
But however the data might not be specific to the researcher‟s needs and at the same time is
incomplete to reach a conclusion. Also, the authenticity of the research results might be
skeptical.

CLASSIFICATION OF DATA
Connor defined classification as: “the process of arranging things in groups or classes according
to their resemblances and affinities and gives expression to the unity of attributes that may
subsist amongst a diversity of individuals”.

TYPES OF CLASSIFICATION
i. Qualitative classification: It is done according to attributes or non-measurable
characteristics; like social status, sex, nationality, occupation, etc. For example, the
population of the whole country can be classified into four categories as married,
unmarried, widowed and divorced. When only one attribute, e.g., sex, is used for
classification, it is called simple classification. When more than one attributes, e.g.,
deafness, sex and religion, are used for classification, it is called manifold classification.
ii. Quantitative classification: It is done according to numerical size like weights in kg or
heights in cm. Here we classify the data by assigning arbitrary limits known as class-
limits. The quantitative phenomenon under study is called a variable. For example, the
population 4 Business Statistics of the whole country may be classified according to
different variables like age, income, wage, price, etc. Hence this classification is often
called „classification by variables‟.
1. Variable: A variable in statistics means any measurable characteristic or quantity which
can assume a range of numerical values within certain limits, e.g., income, height, age,
weight, wage, price, etc. A variable can be classified as either discrete or continuous.
a. Discrete variable: A variable which can take up only exact values and not any
fractional values, is called a „discrete‟ variable. Number of workmen in a factory,
members of a family, students in a class, number of births in a certain year,
number of telephone calls in a month, etc., are examples of discrete-variable.
b. Continuous variable: A variable which can take up any numerical value
(integral/fractional) within a certain range is called a „continuous‟ variable.
Height, weight, rainfall, time, temperature, etc., are examples of continuous
variables. Age of students in a school is a continuous variable as it can be
measured to the nearest fraction of time, i.e., years, months, days, etc

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iii. Temporal classification: It is done according to time, e.g., index numbers arranged over
a period of time, population of a country for several decades, exports and imports of India
for different five year plans, etc.
iv. Spatial classification: It is done with respect to space or places, e.g., production of
cereals in quintals in various states, population of a country according to states, etc.

TABULATION

Tabulation is the presentation of figures from an investigation in a table which consists of rows
and columns of cells, or spaces, each of which provides one unit of information. A table serves
three purposes:
 To provide in a compact form results which the less able, or those who have less time,
can more quickly take in and digest.

 To summarize data for the statistician so that he does not have to handle the raw
material for each investigation he initiates.

 To make it possible to incorporate fresh results as they become known, and sometimes
to discard out-of-date material which is no longer relevant.

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UNIT-2
MEASURE OF CENTRAL TENDENCY

A measure of central tendency is a single value that attempts to describe a set of data by
identifying the central position within that set of data. As such, measures of central tendency are
sometimes called measures of central location. They are also classed as summary statistics. The
mean (often called the average) is most likely the measure of central tendency that you are most
familiar with, but there are others, such as the median and the mode.

The mean, median and mode are all valid measures of central tendency, but under different
conditions, some measures of central tendency become more appropriate to use than others

MEAN

The most common expression for the mean of a statistical distribution with a discrete random
variable is the mathematical average of all the terms. To calculate it, add up the values of all the
terms and then divide by the number of term.

ADVANTAGES

1. Arithmetic mean is simple to understand and easy to calculate.


2. It is rigidly defined.
3. It is suitable for further algebraic treatment.
4. It is least affected fluctuation of sampling.
5. It takes into account all the values in the series.

DISADVANTAGES

1. It is highly affected by the presence of a few abnormally high or abnormally low scores.
2. In absence of a single item, its value becomes inaccurate.
3. It cannot be determined by inspection.

MEDIAN
The middle value that separates the higher half from the lower half of the data set. The
median and the mode are the only measures of central tendency that can be used for ordinal
data, in which values are ranked relative to each other but are not measured absolutely.
ADVANTAGES OF MEDIAN:
1. It is very simple to understand and easy to calculate. In some cases it is obtained simply
by inspection.

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2. Median lies at the middle part of the series and hence it is not affected by the extreme
values.

3. It is a special average used in qualitative phenomena like intelligence or beauty which are
not quantified but ranks are given. Thus we can locate the person whose intelligence or
beauty is the average.

4. In grouped frequency distribution it can be graphically located by drawing ogives.

5. It is specially useful in open-ended distributions since the position rather than the value of
item that matters in median.

DISADVANTAGES OF MEDIAN :
1. In simple series, the item values have to be arranged. If the series contains large number
of items, then the process becomes tedious.
2. It is a less representative average because it does not depend on all the items in the
series. For example, we cannot find a combined median of two or more groups if the
median of different groups are given.

3. It is affected more by sampling fluctuations than the mean as it is concerned with on1y
one item i.e. the middle item.
4. It is not rigidly defined. In simple series having even number of items, median cannot be
exactly found. Moreover, the interpolation formula applied in the continuous series is
based on the unrealistic assumption that the frequency of the median class is evenly
spread over the magnitude of the class interval of the median group.

5. It is not capable of further algebraic treatment.

MODE

The mode is the value that appears most frequently in a data set. A set of data may have one
mode, more than one mode, or no mode at all. Other popular measures of central tendency
include the mean, or the average of a set, and the median, the middle value in a set
ADVANTAGES:

 The mode is easy to understand and calculate.


 The mode is not affected by extreme values.
 The mode is easy to identify in a data set and in a discrete frequency distribution.
 The mode is useful for qualitative data.
 The mode can be computed in an open-ended frequency table.
 The mode can be located graphically.

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DISADVANTAGES:

 The mode is not defined when there are no repeats in a data set.
 The mode is not based on all values.
 The mode is unstable when the data consist of a small number of values.
 Sometimes data have one mode, more than one mode, or no mode at all.

STANDARD DEVIATION

In statistics, the standard deviation is a measure of the amount of variation or dispersion of a set
of values. A low standard deviation indicates that the values tend to be close to the mean (also
called the expected value) of the set, while a high standard deviation indicates that the values are
spread out over a wider range.
Standard deviation may be abbreviated SD, and is most commonly represented in mathematical
texts and equations by the lower case Greek letter sigma σ, for the population standard deviation,
or the Latin letter s, for the sample standard deviation.

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UNIT-3 AND UNIT-4

CORRELATION AND REGRESSION

CORRELATION:

Correlation is a statistical measure that expresses the extent to which two variables are linearly
related (meaning they change together at a constant rate). It‟s a common tool for describing
simple relationships without making a statement about cause and effect.

REGRESSION:

Regression is a statistical method used in finance, investing, and other disciplines that attempts to
determine the strength and character of the relationship between one dependent variable (usually
denoted by Y) and a series of other variables (known as independent variables).

Regression helps investment and financial managers to value assets and understand the
relationships between variables, such as commodity prices and the stocks of businesses dealing
in those commodities.

The two basic types of regression are simple linear regression and multiple linear regression,
although there are non-linear regression methods for more complicated data and analysis. Simple
linear regression uses one independent variable to explain or predict the outcome of the
dependent variable Y, while multiple linear regression uses two or more independent variables to
predict the outcome.

Regression can help finance and investment professionals as well as professionals in other
businesses. Regression can also help predict sales for a company based on weather, previous
sales, GDP growth, or other types of conditions. The capital asset pricing model (CAPM) is an
often-used regression model in finance for pricing assets and discovering costs of capital.

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UNIT-5

INDEX NUMBER

INDEX NUMBER:
Meaning of Index Numbers:
The value of money does not remain constant over time. It rises or falls and is inversely related
to the changes in the price level. A rise in the price level means a fall in the value of money and a
fall in the price level means a rise in the value of money. Thus, changes in the value of money
are reflected by the changes in the general level of prices over a period of time. Changes in the
general level of prices can be measured by a statistical device known as „index number.‟
Index number is a technique of measuring changes in a variable or group of variables with
respect to time, geographical location or other characteristics. There can be various types of
index numbers, but, in the present context, we are concerned with price index numbers, which
measures changes in the general price level (or in the value of money) over a period of time.
Price index number indicates the average of changes in the prices of representative commodities
at one time in comparison with that at some other time taken as the base period. According to
L.V. Lester, “An index number of prices is a figure showing the height of average prices at one
time relative to their height at some other time which is taken as the base period.”

STEPS OR PROBLEMS IN THE CONSTRUCTION OF PRICE INDEX NUMBERS:

The construction of the price index numbers involves the following steps or problems:

Selection of Base Year:


The first step or the problem in preparing the index numbers is the selection of the base
year. The base year is defined as that year with reference to which the price changes in
other years are compared and expressed as percentages. The base year should be a normal
year.
In other words, it should be free from abnormal conditions like wars, famines, floods,
political instability, etc. Base year can be selected in two ways- (a) through fixed base
method in which the base year remains fixed; and (b) through chain base method in
which the base year goes on changing, e.g., for 1980 the base year will be 1979, for 1979
it will be 1978, and so on.

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2. Selection of Commodities:
The second problem in the construction of index numbers is the selection of the
commodities. Since all commodities cannot be included, only representative commodities
should be selected keeping in view the purpose and type of the index number.

In selecting items, the following points are to be kept in mind:


(a) The items should be representative of the tastes, habits and customs of the people.
(b) Items should be recognizable,
(c) Items should be stable in quality over two different periods and places.
(d) The economic and social importance of various items should be considered
(e) The items should be fairly large in number.
(f) All those varieties of a commodity which are in common use and are stable in character
should be included.

3. Collection of Prices:
After selecting the commodities, the next problem is regarding the collection of their prices:
(a) Prices are to be collected from those places where a particular commodity is traded in large
quantities.
(b) Published information regarding the prices should also be utilised,
(c) In selecting individuals and institutions who would supply price quotations, care should be
taken that they are not biased.
(d) Selection of wholesale or retail prices depends upon the type of index number to be prepared.
Wholesale prices are used in the construction of general price index and retail prices are used in
the construction of cost-of-living index number.

4. Selection of Average:
Since the index numbers are, a specialised average, the fourth problem is to choose a suitable
average. Theoretically, geometric mean is the best for this purpose. But, in practice, arithmetic
mean is used because it is easier to follow.

5. Selection of Weights:
Generally, all the commodities included in the construction‟ of index numbers are not of equal
importance. Therefore, if the index numbers are to be representative, proper weights should be
assigned to the commodities according to their relative importance.

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For example, the prices of books will be given more weightage while preparing the cost-of-living
index for teachers than while preparing the cost-of-living index for the workers. Weights should
be unbiased and be rationally and not arbitrarily selected.

6. Purpose of Index Numbers:


The most important consideration in the construction of the index numbers is the objective of the
index numbers. All other problems or steps are to be viewed in the light of the purpose for which
a particular index number is to be prepared. Since, different index numbers are prepared with
specific purposes and no single index number is „all purpose‟ index number, it is important to be
clear about the purpose of the index number before its construction.

7. Selection of Method:
The selection of a suitable method for the construction of index numbers is the final step.
There are two methods of computing the index numbers:
(a) Simple index number and
(b) Weighted index number.

Simple index number again can be constructed either by


(i) Simple aggregate method
(ii) Simple average of price relative‟s method.

Similarly, weighted index number can be constructed either by


(i) Weighted aggregative method
(ii) Weighted average of price relative‟s method.

COST-OF-LIVING INDEX NUMBERS:


These index numbers are constructed with reference to the important goods and services which
are consumed by common people. Since the number of these goods and services is very large,
only representative items which form the consumption pattern of the people are included. These
index numbers are used to measure changes in the cost of living of the general public.

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LIMITATIONS OF INDEX NUMBERS:
Index number technique itself has certain limitations which have greatly reduced its usefulness:

(i) Because of the various practical difficulties involved in their computation, the index numbers
are never cent per cent correct.

(ii) There are no all-purpose index numbers. The index numbers prepared for one purpose cannot
be used for another purpose. For example, the cost-of-living index numbers of factory workers
cannot be used to measure changes in the value of money of the middle income group.

(iii) Index numbers cannot be reliably used to make international comparisons. Different
countries include different items with different qualities and use different base years in
constructing index numbers.

(iv) Index numbers measure only average change and indicate only broad trends. They do not
provide accurate information.

(v) While preparing index numbers, quality of items is not considered. It may be possible that a
general rise in the index is due to an improvement in the quality of a product and not because of
a rise in its price.

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UNIT-6

HYPOTHESIS

A statistical hypothesis is an assumption about a population parameter. This assumption may or


may not be true. Hypothesis testing refers to the formal procedures used by statisticians to accept
or reject statistical hypotheses.

STATISTICAL HYPOTHESES

The best way to determine whether a statistical hypothesis is true would be to examine the entire
population. Since that is often impractical, researchers typically examine a random sample from
the population. If sample data are not consistent with the statistical hypothesis, the hypothesis is
rejected.

There are two types of statistical hypotheses.

 NULL HYPOTHESIS. The null hypothesis, denoted by Ho, is usually the hypothesis
that sample observations result purely from chance.
 ALTERNATIVE HYPOTHESIS. The alternative hypothesis, denoted by H1 or Ha, is
the hypothesis that sample observations are influenced by some non-random cause.

For example, suppose we wanted to determine whether a coin was fair and balanced. A null
hypothesis might be that half the flips would result in Heads and half, in Tails. The alternative
hypothesis might be that the number of Heads and Tails would be very different. Symbolically,
these hypotheses would be expressed as

Ho: P = 0.5
Ha: P ≠ 0.5

Suppose we flipped the coin 50 times, resulting in 40 Heads and 10 Tails. Given this result, we
would be inclined to reject the null hypothesis. We would conclude, based on the evidence, that
the coin was probably not fair and balanced.

HYPOTHESIS TESTS

Statisticians follow a formal process to determine whether to reject a null hypothesis, based on
sample data. This process, called hypothesis testing, consists of four steps.

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 State the hypotheses. This involves stating the null and alternative hypotheses. The
hypotheses are stated in such a way that they are mutually exclusive. That is, if one is
true, the other must be false.
 Formulate an analysis plan. The analysis plan describes how to use sample data to
evaluate the null hypothesis. The evaluation often focuses around a single test statistic.
 Analyze sample data. Find the value of the test statistic (mean score, proportion, t
statistic, z-score, etc.) described in the analysis plan.
 Interpret results. Apply the decision rule described in the analysis plan. If the value of the
test statistic is unlikely, based on the null hypothesis, reject the null hypothesis.

DECISION ERRORS

Two types of errors can result from a hypothesis test.

 Type I error. A Type I error occurs when the researcher rejects a null hypothesis when it
is true. The probability of committing a Type I error is called the significance level. This
probability is also called alpha, and is often denoted by α.
 Type II error. A Type II error occurs when the researcher fails to reject a null hypothesis
that is false. The probability of committing a Type II error is called Beta, and is often
denoted by β. The probability of not committing a Type II error is called the Power of the
test.

DECISION RULES

The analysis plan includes decision rules for rejecting the null hypothesis. In practice,
statisticians describe these decision rules in two ways - with reference to a P-value or with
reference to a region of acceptance.

 P-value. The strength of evidence in support of a null hypothesis is measured by the P-


value. Suppose the test statistic is equal to S. The P-value is the probability of observing
a test statistic as extreme as S, assuming the null hypothesis is true. If the P-value is less
than the significance level, we reject the null hypothesis.
 Region of acceptance. The region of acceptance is a range of values. If the test statistic
falls within the region of acceptance, the null hypothesis is not rejected. The region of
acceptance is defined so that the chance of making a Type I error is equal to the
significance level.

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The set of values outside the region of acceptance is called the region of rejection. If the
test statistic falls within the region of rejection, the null hypothesis is rejected. In such
cases, we say that the hypothesis has been rejected at the α level of significance.

These approaches are equivalent. Some statistics texts use the P-value approach; others use the
region of acceptance approach. On this website, we tend to use the region of acceptance
approach.

ONE-TAILED AND TWO-TAILED TESTS

A test of a statistical hypothesis, where the region of rejection is on only one side of the sampling
distribution, is called a one-tailed test. For example, suppose the null hypothesis states that the
mean is less than or equal to 10. The alternative hypothesis would be that the mean is greater
than 10. The region of rejection would consist of a range of numbers located on the right side of
sampling distribution; that is, a set of numbers greater than 10.

A test of a statistical hypothesis, where the region of rejection is on both sides of the sampling
distribution, is called a two-tailed test. For example, suppose the null hypothesis states that the
mean is equal to 10. The alternative hypothesis would be that the mean is less than 10 or greater
than 10. The region of rejection would consist of a range of numbers located on both sides of
sampling distribution; that is, the region of rejection would consist partly of numbers that were
less than 10 and partly of numbers that were greater than 10.

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