INDEX NUMBERS

Prepared By : P.S. Verma

K.V.AMC, Lucknow.
 Definitions
• “An index number is a statistical measure designed to show
changes in a variable or group of related variables with
respect to time, geographical location or other
characteristics.”
-Spiegel

• “Index numbers are devices for measuring difference in the

magnitude of a group of related variables.”
-Croxten & Cowden

• “Index numbers are quantitative measures of growth of

prices, production, inventory and other quantities of
economic interest.”
-Ronald
 CHARACTERISTICS

 Index numbers are specialized

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

 To frame suitable policies by the Govt.

 They measures change in price level or

the value of money.

 They provide information regarding

Production and Foreign trade.

 Index numbers are very useful in

deflating.
Steps of Index number.

 Choice of the base year.

 Choice of an average.

 Choice of index or formula.

 Selection of commodities.

 Data collection.
METHODS OF CONSTRUCTING
INDEX NUMBER
 Index
Numbers

Simple Weighted

Simple Weighted
Simple Average of Weighted Average of
Aggregative Price Aggregative Price
Relatives Relatives
SIMPLE 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.

P01 
 P 1
100
P 0

P01 = Index number of the current year.

P1 = Total of the current year’s price of all
commodities.
P2 = Total of the base year’s price of all commodities
 Example:-
2004 PRICE (Rs) 2012 PRICE (Rs)
COMMODITY (P0) (P1)

A 50 80
B 40 60
C 10 20
D 5 10
E 2 6
Total ∑P0 =107 ∑P1 =176

P01 
 P
1
100 
176
100 164.49
P0 107
SIMPLE AVERAGE OF PRICE
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 
P01   0 
N
P01 = Index number of the current year.
P1 = Total of the current year’s price of all commodities.

P0 = Total of the base year’s price of all commodities

N = Numbers Of items.
 Example:-
COMMODIT 2004 PRICE (Rs) 2012 PRICE (Rs)
(P0) (P1) PRICE RELATIVES
Y
Wheat 100(per qt) 200(per qt) (200/100) x 100 = 200

Ghee 8(per kg) 40(per kg) (40/8) x 100 = 500

Milk 2(per l) 16(per l) (16/2) x 100 = 800

Rice 200(per qt) 800(per qt) (800/200) x 100 = 400

Sugar 1(per kg) 6(per kg) (6/1) x 100 = 600

N=5 ∑((P1/P0)x100)=2500


P1 

 
 100 

 P0 
 2500
P01   500
N 5
WEIGHTED INDEX
NUMBERS
 WEIGHTED AVERAGE OF
PRICE RELATIVES
METHOD
• 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.
P01 
RW
W

P01 = Index number of the current

year.
R = Price Relative
W = Weight
 Example:-
Weig 2004 2012 P1
Good
ht PRICE PRICE R= P 0 100 RW
s
(W) (P0) (P1)
Whe 100(per 200(per 200
40 200 x 40 = 8000
at qt) qt)
200(per 800(per 400 x 300 =
Rice 30 400
qt) qt) 12000

800 x 15 =
Milk 15 2(per l) 16(per l) 800
12000

40(per
Ghee 10 8(per kg) 400 500 x 10 = 5000
kg)
Suga
5 1(per kg) 6(per kg) 600 600 x 5 = 3000
r
∑W=10 ∑RW =
N=5 0 40,000

P01 
 RW

40,000
 400
W 100
 WEIGHTED
AGGREGATIVE
METHOD
• These index numbers are the simple
aggregative type with the fundamental
difference that weights are assigned to the
various items included in the index.
 Laspeyre’s method.
 Paasche’s method.
 Fisher’s ideal method.
• Laspeyre’s Method:-
This method was devised by Laspeyres in
1871. In this method the weights are
determined by quantities in the
p qbase.
P01 
 1 0
100
pq 0 0
• 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.
p01 
 pq 1 1
100
pq 0 1

• Fisher’s Ideal Index:-

Fisher’s deal index number is the geometric
mean of the Laspeyre’s and Paasche’s index
numbers.
P01 
 p q  p q
1 0 1 1

pq pq
0 0 0 1
 Example:-

Base Year Current Year

Ite
Pri Quantit Pri Quantit p0q0 p0q1 p1q0 p1q1
ms
ce y ce y
(p0) (q0) (p1) (q1)

A 10 10 20 25 100 250 200 500

B 35 3 40 10 105 350 120 400

C 30 5 20 15 150 450 100 300

D 10 20 8 20 200 200 160 160

E 40 2 40 5 80 200 80 200
145 156
Total 635 660
0 0
• Laspeyre’s Method:-

P01 
 pq
1 0
100 
660
100 103.94
pq
0 0 635

• Paasche’s Method:-

P01 
 pq
1 1
100 
1560
100 107.59
pq
0 1 1450

• Fisher’s Ideal Index:-

P01 
pq1 0

 pq
1 1
100 
660 1560
 100
pq0 0 pq
0 1 635 1450

  1.03 1.07 100  1.1021 100 105

THANK YOU