Index Numbers

Index Number
An index number is a device that measures the changes occurring in
the data from time to time and place to place.
index numbers are generally classified into Simple Index Numbers and Composite Index
Numbers

Simple Index Number

An index number is called simple index number when it is computed for a single variable.
For example,
Index number of student’s enrollments

Composite Index Numbers

An index that is computed from two or more variables is referred to as a composite index
number
For example
 Whole sale price index number
 Consumer price index number
Composite indices may further be classified into Un-weighted Index numbers and
Weighted Index Numbers

Selection of base period

A period from which the changes are measured. The prices of all periods are then
expressed as percentages of the base period prices. Two methods of selecting the base
period are available
They are:
 Fixed Base Method
 Chain Base Method
Fixed Base Method / Price Indices / Price relatives
A fix base method is one in which a particular year is generally chosen as the base period
that remains unchanged during the life term of the index. It is relevant to note that
 The base year should not be too far distant in the past
 Should be a normal year, it means that a year of economic stability
and free from any major financial crisis caused by inflation,
depression, wars, labor unrest, lock outs etc
 It is the year during which prices may have remained more or less
stable.

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Price Relatives = price of a commodity in the given year X 100
Price of a commodity in the base year

Pn
Pon  100
Po
Where
N represents the current year
O represents the base year

Example 5.1 (BOOK)

Index No.
Prices Index No. 1948
Years First 5 years
(Rupees) as base
base
Pn Pn
Pon  100 Pon  100
Po Po
5.25
100  100
1948 5.25 5.25 91

5.87
100  112
1949 5.87 5.25 101

6.12
100  117
1950 6.12 5.25 106

5.50
100  105
1951 5.5 5.25 95

6.25
100  119
1952 6.25 5.25 108

6.62
100  126
1953 6.62 5.25 114

6.75
100  129
1954 6.75 5.25 116

7.12
100  136
1955 7.12 5.25 123

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 Chain Base Method / Chain Indices / Link relatives
Is a method in which the base period is not fixed but moves with the given year. That is, the
relatives are computed with the immediately preceding year as the base and such
relatives are called link relatives.

Link Relatives = price of a commodity in the given year X 100

Price of a commodity in the preceding year

Pn
P( n 1), n  100
Pn 1
Example 5.5 (BOOK)

Simple
Link relatives
Sum of average
Year Chain Indices
relatives of
Wheat Rice Maize
relatives
1940 100 100 100 300 100 100
3.40 10.80 3.20 343 100  114
100  121 100  103 100  119  114  114
1941 10.50 2.70 114
2.80 3 100
3.60 104  114
100  106  118.6
1942 3.40 109 109 104 104 100

4.00 108 118.6

100  111  128.1
1943 3.60 109 109 108 108 100

4.20 128.1105
100  105  134.5
1944 4.00 105 105 105 105 100

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Composite Index Numbers

1. Un-weighted Index Numbers

2. Weighted Index Numbers

Un-Weighted Index Numbers

1. Simple Aggregative Index
2. Simple Average relatives

Simple Aggregative Index Example 5.2 (Book)

 P 100n

P o

Simple Average Relatives Example 5.3 (Book)

 Pn 
  P 100 
 o 
K
where
k  n ( no. of values )

Weighted Index Numbers

4 to 5 formulas are used to calculated weighted index numbers
1. Laspeyer’s Price Index

Pon 
Pq n o
100
Pq o o

2. Paasche’s Price Index numbers

Pon 
 Pq n n
 100
Pq o n

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 3. Marshall Edge worth Price Index

Pn  qo  qn 
Pon  100
Po  qo  qn 

4. Fisher’s Ideal Index

Pon  Laspeyer  Paasche


Pq  Pq
n o n n
100
Pq Pq
o o o n

5. Lapper Method

 Pn 
  P Po qo
Pon   o  100
 Po qo
P1
 I and Po qo  W
P0

Quality Index Numbers

Replace the P with q and q with P in the formula

Qon 
 q P 100
n o

q P o o
Paasche’s Price Index numbers

Qon 
 q P 100
n n

q P o n

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Consumer Price Index Number

1. Aggregative, Expenditure Method

Pon 
 Pq n o
100
Pq o o

2. House hold Budget (Relative)

 Pn 
  P Po qo
Pon   o  100
 Po qo
P1
 I and Po qo  W
P0

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