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INDEX NUMBERS

INDEX NUMBERS are mesures that express a changing price, quantity


or productivity level in terms of the level at some fixed point in a base
period.

There are two index numbers:


- Price index
- Quantity Index

Index number is applied in many areas such as:


- Economics
- Climatology

Price index is a measure that express a current (changing) price level in terms of
the level at a fixed point in time called the base period.

Formula for Index numbers


Io/t = Pt .100
Po
IO/t = Qt . 100 , Io/t = Index number at year t base year o.
Qo
Pt = Price at year t.
PO = Price at base year.
Qt = Quantity at year t.
QO = Quantity at base year.

Example
Table I
Year Production Indexs

1974 75 100
1975 60 80
1976 65 87
1977 70 93

The year 1974 is a base year.

I 1974 / 1975 = 60/75 . 100 = 80 and so on.

Time period can also be used as a base period. For example 1974- 75
Based on the previous example:

Qo = 75 + 60 = 67,5
2

Year Production Indeks


1974 75 75 / 67,5 . 100 = 111,1
1975 60 60 / 67,5 . 100 = 88,8
1976 65 65 / 67,5 . 100 = 96,3
1977 70 70 / 67,5 . 100 = 103,7

How to choose a base year

1. Normal year (period)


2. The year (period) is not to long or short period
3. The year (period) is not a long time ago.

CHANGING THE BASE YEAR

How do we compute a new index number if the base year changes.

1. If the information about price or quantity is available, we can use the


previous formula.
2. If the information about price or quantity is not available, we can use the
following formula.
IB = 100 . IL IB = New Indeks
IA IA = Old index of the new base year
IL = Old index

See Table ......... ( I ).


Let a new base year is 1975
Compute : I 1975 / 1976 = ......... ?

Method I :
I B = Q 1976 . 100 = 65 x100 = 108
Q 1975 60
Method II :
I A = 80
IL = 87
I B = I L .100 = 87 x100= 108
IA 80
Index Numbers Simple Index Numbers
Composite Index Numbers(CIN)

Simple Aggregate Index Numbers

Average of relatives Index Numbers


- Arithmetic Mean
-Geometric Mean
-Median, Modus, Harmonic Mean

Unweighted
Index Numbers

Weighted Aggregate Index Numbers


-Laspeyres
Composite -Paasche
Index Numbers -Marshall Edggwort
-Drobisch
-IrvingFisher

Weighted
Index Numbers

Weighted Index Numbers

Simple Index Numbers

Simple price index is a measure that express a current (changing) price level of a
commodity (an item) in terms of the level at a fixed point in time called the
base period.

Composite Index Numbers

Composite price index is a measure that express a current (changing) price level
of some commoditie (items) in terms of the level at a fixed point in time called
the base period.

Example: Groceries

Example: Prices of some groceries at a regency in 1955 and 1960

Groceries Price Price Relative Price


Year 55 Year 60 Pt/Po 100( % )

Rice per kg : 2,6 6,5 250


Potato per kg : 0,4 1,1 275
Meat per kg : 13,3 39,9 300
Coconut per unit : 0,7 2,8 400
Salt ½ kg : 0,5 0,8 160
Total : 17,5 51,1 1385
Formula I Unweighted
Simple Aggregate / Unweighted (AT)

For example: Index number (IN) at year 60 and base year 55


I AT = ∑ Pt.100 =
∑ Po
= 51,1 . 100 = 292
17,5
Relative price = Pt . 100
Po
Example. Relative price for rice 6,5 . 100 = 250
2,6
Average of Relative with:
1. Arithmetic
I Rt = ∑ Pt / Po .100 = = 1385 / 5 =277
K
K = Numbers of groceries

2. Geometric mean
IUT = ( √TT Pt/Po) 100

3. Median
I MT = Median of Relative price

4. Modus
Imot = Modus of Relative price

5. Harmonic Mean
IHAT = K
∑1 . 100
Pt/Po

6. Kuadratic Mean

I RKT = 100. ∑ ( Pt /Po ) 2


K

Formula of Weighted Aggregate Index Numbers

General formula:

Io/t = ∑ Pt. W . 100 W = Weight


∑ Po W

1. If W = Qo Index Laspeyres

IL = ∑ Pt Qo . 100
∑ Po Qo

Qo = quantity at base year

2. If W = Qt Index Paasche
Ip = ∑ Pt.Qt . 100
∑ Po.Qt
Qt = Quantity at year t
3. If W = Qo + Qt Index Marshall Edgeworth
IM = ∑ Pt (Qo + Qt ) .100
∑Po (Qo + Qt)

4. Bila IL dan IP is very different.


ID = (IL + IP) , ID = Index Drobich
2
IF = √ I L . Ip , IF = Index Irving Fischer

Formula weighted average of relative


General formula

Io/t = ∑ (Pt/Po).w.100, W = weight


∑w

1. If w = Po Qo
I o/t = ∑ (Pt/Po)PoQo).100
∑ Po Qo
2. If W = Pt.Qo
I o/t =∑ (Pt/Po) PoQo .100
∑ Pt Qo

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