STATISTICS FOR

AGRICULTURE AND
BIOLOGICAL SCIENCES
STS 201 / Statistics Department

Dr. Ariyo, O.S

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Objectives
At the end of this class you should be able to:
• Describe the term index.

• Understand the difference between a weighted and an

unweighted index.
• Construct and interpret a Laspeyers price index

• Construct and interpret a Paasche price index

• Construct and interpret a value index.

• Explain how the Consumer Price Index is constructed

and interpreted.

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Index Numbers
• What is an index number?

• INDEX NUMBER A number that expresses the relative change in

price, quantity, or value compared to a base period

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 Example

• In 1995 the average salary of wage • 𝐼=

earners 15 years and older in
Abeokuta was N20 828 per year. In • 𝐼= (100) = 116.0
2001, it was N24 165 per year.
• What is the index of yearly earnings
of workers over age 15 in Abeokuta
for 2001 based on 1995? • Thus, the yearly salaries in 2001 compared to
1995 were 116.0 percent. This means that there
was a 16 percent increase in yearly salaries during
the six years from 1995 to 2001, found by
116.0100.016.0.

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• Statistics Canada results show that the number of farms in Canada
dropped from 276 548 in 1996, to an estimated 246 923 in 2001. What
is the index for the number of farms in 2001 based on the number in
1996? The index is 89.3

• An index can also compare one item with another. The population of
British Columbia in 2003 was 4 146 580 and for Ontario it was 12 238
300. What is the population of British Columbia compared to Ontario?
• The index is 33.9

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Why Convert Data to Indexes?

• Indexes allow us to express a change in price, quantity, or value as a

percent.

• An index is a convenient way to express a change in a diverse group of

items. The Consumer Price Index (CPI), for example, encompasses
many items—including gasoline, golf balls, lawn mowers, hamburgers,
funeral services, and dentists’ fees.

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Construction of Index Numbers
• Simple index X 100
• Suppose that the price of Cement in 1998 was N1500.The price rose
to N2000 in 2004. What is the price index for 2004 using 1998 as the
base period and 100 as the base value?

• X 100 = 133.3

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• Gasoline prices in cents per litre for Winnipeg, Manitoba from 1996 to
2003 are listed below.

2003 2002 2001 2000 1999 1998 1996

Manitoba 68.2 64.1 66.4 67.4 58.5 54.1 57.8

Develop a simple index for the change in price per litre

based on the average of years 1998–2000.

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Simple Average of the Price Indexes
• SIMPLE AVERAGE OF THE PRICE RELATIVES=
𝒊

• Where refers to the simple index for each of the items and
n the number of items.

• Calculate the simple average price relative index for the

example above.

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Weighted Indexes
• Two methods of computing a weighted price index are the
Laspeyres method and the Paasche method.

• They differ only in the period used for weighting.

• The Laspeyres method uses base-period weights; that is, the original prices
and quantities of the items bought are used to find the percent change
over a period of time in either price or quantity consumed, depending
on the problem.
• The Paasche method uses current-year weights for the denominator of the
weighted index.

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Laspeyres’ Price Index
• LASPEYRES’ PRICE INDEX
• x100

• Where
• P is the price index.
• pt is the current price.
• p0 is the price in the base period.
• q0 is the quantity used in the base
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Items Price in Naira Quantity (2005) Price (2010) Quantity (2010)
(2005)

Bread 0.77 50 1.98 55

Eggs 1.85 26 2.98 20

Milk 0.88 102 1.98 130

Apples 1.46 30 1.75 40

Orange 1.58 40 1.70 41

Coffee 4.40 12 4.75 12

Determine a weighted price index using the Laspeyres method. Interpret the result.
ANS: 165.4 we conclude that the price of this group of items has increased
65.4 percent in the ten year period.

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PAASCHE’S PRICE INDEX
• x100

• Calculate the Paasche’s index for the example above;

• Ans: 168.4 : This result indicates that there has been an increase of 68.4
percent in the price of this market basket of goods between 2005 and
2010.

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Laspeyres’

Advantages:
Requires quantity data from only the base period. This allows a more
meaningful comparison over time.

Disadvantages:
• Does not reflect changes in buying patterns over time. Also, it may

overweight goods whose prices increase.

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Paasche’s

Advantages:
• Because it uses quantities from the current period, it reflects current

buying habits.

Disadvantages:
• Because different quantities are used each year, it is impossible to

attribute changes in the index to changes in price alone. It tends to

overweight the goods whose prices

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Outline:
An index number measures the relative change from one period to
another.
The major characteristics of an index are:
1. It is a percentage, but the percent sign is usually omitted.
• 2. It has a base period.

• 3. Most indexes are reported to the nearest tenth of a percent, such as

153.1.
• 4. The base of most indexes is 100.

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Outline:
• The reasons for computing an index are:
1. It facilitates the comparison of unlike series.
2. If the numbers are very large, often it is easier to comprehend the
change of the index than the actual numbers.

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Questions
An index number is called a simple index when it is computed from: (a)
Single variable (b) Bi-variable (c) Multiple variables (d)None of them
• Index numbers are expressed in: (a) Ratios (b) Squares (c)Percentages
(d)Combinations.
• When index number is calculated for several variables, it is called:

(a) Composite index (b) Whole sale price index © Volume index (d)
Simple index.
Price relatives are a percentage ratio of current year price and: (a) Base
year quantity (b) Previous year quantity © Base year price
(d) Current year quantity.

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Questions
Consumer price index numbers are obtained by: (a) Laspeyre's formula (b)
Fisher ideal formula © Marshall Edgeworth formula (d) Paasche's
formula.
Laspeyre's index = 110, Paasche's index = 108, then Fisher's Ideal index is
equal to: (a)110, (b) 108 © 100 (d)109

The most appropriate average in averaging the price relatives is: (a)Median
(b) Harmonic mean © Arithmetic mean (d) Geometric mean.

Base year quantities weights are used in: (a) Laspeyre's method (b)
Paasche's method © Fisher's ideal method (d) Difficult to tell
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Questions
• While computing a weighted index, the current period quantities are
used in the: (a) Laspeyre's method (b) Paasche's method © Marshall
Edgeworth method (d) Fisher's ideal method.

• When the base year values are used as weights, the weighted average of
relatives price index number is the same as the: (a) Laspeyre's index (b)
Paasche's index © Simple aggregative index (d) Quantity index

Fisher's ideal index number is the geometric mean of the:

(a) Laspeyre's and Marshall Edgeworth indices (b) Laspeyre's and
Paasche's indices © Paasche's and Marshal Edgeworth indices (d) all of
the above All of the above 20
Questions
• A number that measures a relative change in a single variable with
respect to abase.is called: (a) Good index number (b)Composite index
number © Simple index number (d) Quantity index number.
• A number that measures an average relative change in a group of
related variables with respect to base is called: (a) Simple index number
(b) Composite index number © Price index number (d) Quantity index
number.
• An index number constructed to measure the relative change in the
price of an item or a group of items is called: (a)Quantity index number
(b) Price index number © Volume index number (d) Difficult to tell

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Paasche's price index number is also called: (a) Base year weighted
(b) Current year weighted © Simple aggregative index (d) Consumer
price index.
Laspeyre's price index number is also called: (a) Base year weighted (b)
Current year weighted © Cost of living index (d) Simple aggregative
index.
Index number having downward bias is: (a) Laspeyre's index (b)
Paasche’s index © Fisher's ideal index (d) Marshall Edgeworth index.
Index number having downward bias is: (a) Laspeyre's index (b) Paasche’s
index © Fisher's ideal index (d) Marshall Edgeworth index

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