Index Numbers

INDEX NUMBERS
UNWEIGHTED INDEX NUMBERS

• An unweighted price index number tends to measure the change in the
process of a single commodity or group of commodities in percentage
form between two different periods. In unweighted index numbers, all the
values evaluated in the study tend to hold equal significance.
Sub-methods of unweighted index numbers
are as follows:
• 1.SIMPLE AGGREGATIVE METHOD
• 2.SIMPLE AVERAGE OF PRICE RELATIVES METHOD
1.SIMPLE AGGREGATIVE METHOD
• This is the simplest method of constructing index numbers.
• When this method is used to construct a price index the total of current year prices for the
various commodities in question is divided by the total of base year prices and quotient is
multiplied by 100.
• Symbolically:
• P01 =ΣP01/ΣP0×100
• ΣP1=total of current year prices for various commodities
• ΣP2=total of base year prices for various commodities.
• This method of constructing the index is the simplest of all the methods .
The step required in computation are:
• 1)Add the current year prices for various commodities,ie;obtained ΣP1
• 2) add the base your prices for the same commodities, ie;obtain ΣP0
• 3)Divide ΣP1 by ΣP0 and multiply the quotient by 100.
 QUESTION : From the following data calculate
index for 2008 by taking 2007 as base.
COMMODITY PRICE IN 2007 PRICE IN 2008
A 50 70
B 40 60
C 80 90
D 110 120
E 20 20
LIMITATIONS:
 The units used in the price of quantity quotation can exert a big influence
on the value of the index.
 No consideration is given to the relative importance of commodities.
2.SIMPLE AVERAGE OF PRICE RELATED
METHOD
• When this method is used to construct a price index,first of all price
relatives are obtained for the various items included in the index and then
average of these relatives is obtained using any one of the measures of
centeral value.
• ie;Arithmetic mean,median,mode,geometric mean or harmonic mean.
When the arithmetic mean is used for averaging the relatives,the
formula for computing the index is,
Where,
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=number of items whose price relatives are averaged
When geometric mean is used for averaging the price relatives ,
The formula of obtaining the index becomes;
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=number of items whose price
relatives are averaged
 From the following data construct an index for 2007 taking 2006 as
base by the average of relatives method using arithmetic mean and
geometric mean for averaged relatives:
COMMODITY PRICE IN 2006(Rs.) PRICE IN 2007(Rs.)

A 50 70
B 40 60
C 80 90
D 110 120
E 20 20
Index numbers using arithmetic mean of price relatives;
COMMODITY PRICE IN PRICE IN PRICE

2006(Rs.) P0 2007(Rs.) RELATIVES
P1 P1/P0 X 100
A 50 70 140.0
B 40 60 150.0
C 80 90 112.5
D 110 120 109.1
E 20 20 100.1
ΣP1/P0 X 100=611.6
P01=(ΣP1/P0 X 100)/N =
122.32
Index number using geometric mean of price relatives ;
COMMODIT PRICE IN PRICE IN PRICE LOG P

Y 2006(Rs.)P0 2007(Rs.)P1 RELATIVES
P
A 50 70 140.0 2.1461
B 40 60 150.0 2.1761
C 80 90 112.5 2.0512
D 110 120 109.1 2.0378
E 20 20 100.0 2.0000
Σlog P=10.4112
P01=Antilog(ΣlogP/N)
=Antilog(10.4112/5)
=Antilog2.0822
=120.9
WEIGHTED INDEX NUMBERS
• In general,all the commodities cannot be given equal importance so we
can assign weights to each commodity according to their importance and
the index number computed from these weights are called as weighted
index number
• WEIGHTED INDEX NUMBER are of two types;
1. Weighted aggregative indices
2. Weighted average of relatives
Weighted aggregative indices
1. Laspeyres method
2. Paasche method
3. Dorbish and Bowley’s method
4. Fisher’s Ideal method
5. Marshall-Edgeworth method
6. Kelly’s method
LASPEYRE’S METHOD
• It is a weighted aggregate price index,where the weights are determined
by quantities in the base period.
• The formula for constructing the index is;
• P01= (Σp1q0/ Σp0q0) x 100
P01=price index of current year
p0=price of goods at base year
q0=quantity of goods at base year
p1=price of goods at the current year
PAASCHE’S METHOD
• The method of calculating weighted index number under which the current
year’s quantities are used as weights of different items.
• Paasche’s Index Number (P01)= Σp1q1/ Σp0q1 x 100
• P01=Price index of current year.
• p0=Price of goods in base year.
• q1=Quantity of goods in base year.
• p1=Price of goods in the current year.
FISHER’S IDEAL METHOD
• In this method both the base year and current year’s quantities as used as
weights
• Fisher’s price index number
•
• OR P01=√L xP
P01=price index of current year
p0=price of goods at base year
q0=quantity of goods at base year
p1=price of goods at the current year
•
DORBISH AND BOWLEY’S METHOD
• It is the arithmetic mean of both Paasche’s and Laspeyre’s price index
number;
•
Where L= Laspeyres index,P =Paasche index
MARSHALL-EDGEWORTH METHOD
• In this method also, both the current year as well as base year prices and
quantities are considered.
• The formula for constructing the index is;
• P01=
• On opening brackets;
KELLEY’S METHOD
• Truman Lee Kelley has suggested the following formula for constructing
index numbers.
• Here weights are quantities which may refer to some period,not
necessarily the base year or current year.
• Thus the average quantity of two or more years can be used as weights
• Formula;
Construst index numbers of price from the following data by applying by all
the above methods
COMMODITY 2019 2020

PRICE QUANTITY PRICE QUANTITY
A 20 8 40 6
B 50 10 60 5
C 40 15 50 15
D 20 20 20 25
COMMO 2019 2020
DITY
p1q0 p0q0

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INDEX NUMBERS

UNWEIGHTED INDEX NUMBERS

P01=index number of the current

COMMODITY PRICE IN 2006(Rs.) PRICE IN 2007(Rs.)

COMMODITY PRICE IN PRICE IN PRICE

COMMODIT PRICE IN PRICE IN PRICE LOG P

COMMODITY 2019 2020

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