Statistics Index Number Methods

Probability and Statistics Unit 9
Unit 9 Index Number

Structure:
9.1 Introduction
Objectives
9.2 Problems in the construction of Index number
9.3 Types of Index Number
9.4 Different methods of computing an Index number
Simple Aggregate method
Simple Relative method
Weighted relative method
Weighted aggregate Index numbers
9.5 Test of Good Index Number
9.6 Summary
9.7 Terminal Questions
9.8 Answers
9.1 Introduction
Index number as the name indicated shows the numerical measure of the
changes specified over a specific time period in cost of living, sales, imports
and exports, prices of different commodities, etc. Index number is described
as barometers of economic activity. These are playing an increasingly
significant role in business planning and in the formulation of executive
decisions. The idea of Index number came into existence in the year 1764 in
Italy when they want to compare the price level changes of 1750 to the price
level of 1500.
Objectives:
At the end of this unit you should be able to:
Understand index number and its uses
Learn different types of index numbers.
know the different types of test to check the goodness of index numbers.
9.2 Problems in the construction of Index number

Index number according to Horace Sacrist is defined as It is series of
numbers by which changes in the magnitude of a phenomenon are
measured from time to time or place to place
Sikkim Manipal University Page No.: 261

The construction of index number involves a lot of problems for a

statistician. Some of the important problems are:
1. Purpose of Index number
2. Selection of Base year
3. Selection of number of items
4. Selection of data
5. Selection of appropriate weights
6. Selection of suitable method of averaging
1. Purpose of Index Number: The first and important thing is to specify
the purpose of using index number. There are many purposes for which
the index number may be constructed like measure to general price
level changes in a country or to measure the changes in the cost living
of a particular section of people or any other. All other problems such as
base year, number of items, selection of data, etc are decided once the
purpose of index number is fixed.
2. Selection of Base year: Base period is defined as the period in which
data of any other year is compared to know the percentage of increase
or decrease in changes. The index for the base year is always taken as
100. While selecting base year following points should be kept in mind:
i) The base year should be normal : The period that we are selecting
as a base year should be normal in the sense that it should be free
from all abnormalities like wars, earthquakes, famines,
depressions, booms etc. Although at some times it is very difficult
to select a year which is normal in all respect. If this is the case
then the average of a number of years may be taken as a base
year.
ii) The base year should not be too distant from the given period:
Since index numbers are helpful in decision making and economic
policies, so the base year should not be too far back relative to the
given period. This is because if the difference between base year
and relative period is too long then there is possibility of total shift
in the situation. For example for deciding about the DA (dearness
allowance) increment to government employees, the comparison
should be with the preceding year or year after which dearness
allowance has not been revised.

iii) Fixed Base or Chain Base: While selecting the base year it should
be clear that it is fixed base or chain base. In fixed base method,
the year or period of year to which all other prices of a year to
which all other prices are related is constant for all times. In case
of chain base method the prices of a year are linked with those of
the preceding year and not with the fixed year.
3. Selection of number of items: The next problem in the construction of
index number is the selection of items and their varieties. The number of
items and their varieties included in the index should neither be too big
nor too small. While constructing the index number every item cannot be
included. The selection of items should be in such a way that it is used
by most of the people.
4. Selection of Data: The data related to set of prices and of quantities
consumed for the selected commodities for different periods, places etc
is used to construct the index numbers. Note that the data should be
collected from reliable source.
5. Selection of appropriate weights: The problem of selecting suitable
weights to different commodities is very important and at the same time
very difficult also as all items is not equally important. There are two
types of indices (i) Unweighted Indices (ii) Weighted Indices
Unweighted indices: are those in which no specific weights are attached
to various commodities
Weighted Indices: are those in which appropriate weights are assigned
to various items.
In case of weighted index numbers, weights may be assigned either
explicitly or implicitly. Under explicit manner, weights are assigned
differently to different items in some quantitative manner. But under
implicit method, weights are assigned by repeating an item for a number
of times of their varieties which may appear Unweighted.
6. Selection of suitable method of averaging: Since index numbers are
specialized averages, so need to decide which particular average of
arithmetic mean, median, mode, geometric mean or harmonic mean
should be used for constructing the index number. But median and
mode are never used in constructing the index number. So the choices
has to be made between Arithmetic mean and Geometric mean.

Theoretically Geometric mean is the best average in the construction of
index number because
i) it gives equal weights to equal ratios of change,
ii) does not give undue weightage to extreme observations,
iii) Geometric mean based indices are reversible
Despite of its theoretical importance, arithmetic mean is more popularly
used as it is simpler to compute. But Geometric mean gives more accurate
results.
9.3 Types of Index Number

The various types of index number are as follows:
1. Price index number: It is the most popular and fundamental type of
index number. This index number measures the changes in a price of
level of current period on the basis of the price level of a base year. It is
defined as
Where, = price index of the current year on the basis of the base
years price of a particular commodity.

= Price of the current year
= Price of the base year
2. Quantity Index number: It measures the change in the quantities of

items consumed or produced or distributed during a year under study
with reference to base year. That is,
Where, = quantity index number of the current year on the basis of
the base years quantity of a particular commodity.

= quantity consumed in the current year
= quantity consumed in the base year

3. Value Index Number: It measures the change in the level of value of

items like product of the quantity and their prices consumed during the
year with reference to the level of value of the items consumed in the
base year. That is,
Where, = value index of the current year on the basis of the base
years value.
= values of the items consumed in the current year
= values of the items consumed in the base year
4. Weighted Index number: It is an index number which is calculated after

assigning some weightage to items under study.
Where, = weighted price index of the current year on the basis of
its base years price.
= Index or price relative i.e.
W = Weighted assigned
= Value of the items in the base year i.e.,
5. Fixed Base Index Number: It is the index number computed for number
of years on the basis of a fixed base year. It is also known as price
relatives. The formula for fixed base index number is
Where, = Price relative of the current year

= Price of the fixed base year
6. Chain Base Index Number: It is the index number computed for

number of years on the basis of a shifting base years or immediately
preceding years data. It is also known as link relatives. The formula for
chain base index number is
Where, = Link relative of the current year

= Price of the fixed base year
Note: Fixed base index number can be converted into chain base index
number as
Where, = link relative of the current year
= Price relative of the current year
= Price relative of the immediately preceding year
Chain base index number can be converted into fixed base index number as
Where, = Price relative of the current year
= Link relative of the current year
= Price relative of the immediately preceding year
7. Plural Index Number: It is the index number calculated for a number of

years either for price, quantity or value. Such index number can be
calculated either on the fixed base period method or chain base period
method.
8. Cost of living Index Number or (Consumer Price or Retail Price
Index Number): This index number is constructed to measure the effect
of changes in the price of a set of goods and services on the purchasing

power of a particular community of people during a given period as

compared to some base year. Note that such index numbers are
constructed separately for different classes of people like factory worker,
agriculture laborers, govt. employee etc.
9. Industrial Activity Index number: Industrial or business activity index
numbers are constructed to measure the changes in the level of
quantities produced or distributed during a period with reference to some
base period. In this index number we require only quantities of the
product dealt within the base year and the current period and not the
price or the value of the goods are required.
9.4 Different methods of computing an Index number

The methods of computing index number is divided into two main categories
1. Simple
2. Weighted
Which are further classified as shown in the following diagram
Method of Index Number
Simple weighted
Aggregate Relative Aggregate Relative

Weighted aggregate is again divided into following eight methods:
1. General
2. Laspeyres
3. Paasches
4. Fishers
5. Drobish
6. Marshal & Edgeworths
7. Kelleys
8. Walschs
Now we will discuss few of these methods in detail
9.4.1 Simple Aggregate method

In this method we express the aggregate of prices in any year as a
percentage of their aggregate in the base year. Thus, price or quantity index
for the ith year (i = 1,2,3, ) as compared to base year ( i = 0)
Example: From the following data construct an index number for 2011
taking 2010 as base year
Commodity and unit Price (Rs) of 2010 Price (Rs) of 2011

Refined oil (Kg.) 165.00 195.00
Cottage cheese (Kg.) 90 120
Milk(lt.) 25 35
Bread(1) 20 40
Eggs(Doz.) 18 20
Ghee (1 tin.) 900 1000
Solution: Base year for the above example is 2010. It is denoted by . So
Current year is considered as 2011. It is denoted by ,
Therefore, price index number = 117.70
Thus in the year 2011 there is net increase in price of commodities in the
index year to the extent of 17.70%.
SAQ 1: From the following data relating to prices of different items calculate
the price indices for 1991 and 1992 on the basis of the prices of 1990.
Items Units Prices in 1990 Prices in 1991 Prices in 1992

Rice Kg 10 12 15
Dal Kg 2 3 5
Housing rent P.M 300 400 500
Clothes Metre 25 30 40
Misc. Dozen 8 10 15

2. Simple Relative method: The price index under this method is computed
by the formula (when Mean is used)
= (when G.M. is used)
Where, = Price index of the current year on the basis of its base years
price.
= price relative of the respective items i.e.

= Price of the base year
N = Total number of items

Example: Construct the index number by simple relative method for 2000
taking 1998 as the base year using arithmetic mean and geometric mean.
Commodities Dal Rice Milk Cheese Bread

Pricein 1998 20 30 10 25 40
Pricein 2000 25 30 15 35 45
Solution: Using Arithmetic mean

Price in 1998 Price in 2000 Price relative
Commodity
Dal 20 25 125
Rice 30 30 100
Milk 10 15 150
Cheese 25 35 140
Bread 40 45 125
Total N = 5
So, the price index number is given by

Using Geometric mean
Price in 1998 Price in 2000 Price relative

Commodity Log I
Dal 20 25 125 2.0969

Rice 30 30 100 2.0000
Milk 10 15 150 2.1761
Cheese 25 35 140 2.0969
Bread 40 45 125
Total N = 5 10.5160
The index number is given by
= 126.82
SAQ 2: Compute price index by simple average of price relatives method
based on (a) arithmetic mean, (b) geometric mean taking 2009 as a base
year
Commodity and Unit Prices 2009 Price 2010

Butter (Kg) 110 120
Cheese(Kg.) 75 80
Milk(lt.) 13 13
Bread(1) 9 9
Eggs(Doz.) 18 20
Ghee(1 Tin) 850 860
3. Weighted relative method

This method is also known as weighted price relative method or family
budget method. In this method the index is computed as
(when Mean is used)
= (when G.M. is used)

Where, = Price index of the current year on the basis of its base years
price.
= price relative of the respective items i.e.
P = Price index or Price relatives as above

W = weight i.e.,
= value of the commodities consumed in the base year i.e., or in the
current year
Example: From the following data construct the weighted relative Index
number for 2000 using arithmetics mean and Geometric mean and by
taking the values of the base year as the respective weights.
1998 2000
Commodity
Price Quantity Price Quantity
Sugar 500per qtl 8 qtl 600 per qtl 10 qtl
Flour 10 per kg 50 kgs 15 per kg 60 kgs
Milk 4 per litres 180 litres 6 per liter 200 litres
Vegetables 5 per kg 200 kgs 8 per kg. 250 kgs
Solution: Using Arithmetic mean
Price relative
1998 2000 Values
Commodity
V=
P0 Q0 P1 Q1
Sugar 500 8 600 10 120 4000 480000
Flour 10 50 15 60 150 500 75000
Milk 4 180 6 200 150 720 108000
Vegetables 5 200 8 250 160 1000 160000
Total 6220 8,23,000

Weighted arithmetic mean of the price relatives is
Price
1998 2000 relative Values
Commodity Log I V. Log I
V=
P0 Q0 P1 Q1
Sugar 500 8 600 10 120 4000 2.0792 8316.8
Flour 10 50 15 60 150 500 2.1761 1088.05
Milk 4 180 6 200 150 720 2.1761 1566.79
Vegetables 5 200 8 250 160 1000 2.2041 2204.1
Total 6220 13175.74
Weighted geometric mean of the price relatives is
Example: A middle class families in a city gave the following information:

Commodities Expenses (%) Price 2002 Price 2005
Food 30 100 90
Rent 15 20 20
Clothing 20 70 60
Fuel 10 20 15
Others 25 40 55
Compute the weighted A.M. and Geometric mean of price relatives.

Solution:
Prices Price relative
Weights
Commodity 2002 2005 W.P Log P W. Log P
(W)
P0 P1
Food 100 90 30 90 2700 1.9542 58.626
Rent 20 20 15 100 1500 2.0000 30.000
Cloth 70 60 20 85.7 1714 1.9330 38.660
Fuel 20 15 10 75 750 1.8751 18.751
others 40 55 25 137.5 3437.5 2.1383 53.457
Total 100 10101.5 199.494

Weighted arithmetic mean of the price relatives is
Weighted geometric mean of the price relatives is
4. Weighted aggregate Index numbers

In this method the index number of prices for any year can be calculated by
assigning suitable weights to the different items.
Weighted aggregate price index
Where, = price index of the current year w.r.t. the base year
= Sum of products of the price of the current year and the respective
weights of the items
= Sum of the products of the price of the base year and the
respective weights of the items
Based on the use of different types of weights, a number of formulae has
developed by different statisticians for constructing index number.
a) Laspeyres Price Index (or base year) method: In this method the
base year quantities are taken as weights. That is,
b) Paasches Price index (or Given year) method: In this method the
current year quantities are taken as weights. That is,
c) Dorbish and Bowleys method: This method is based on the methods

of Laspeyre and Paasche method. In this method we take the arithmetic
average of Laspeyre and Paasche method. That is,

Where, L = Laspeyres index number

P = Paasches index number
Thus,
d) Fishers Ideal Method: This index number is the geometric mean of

Laspeyre and Paasche method. That is
e) Marshall-Edgeworth Method:
In this method we take the average of quantities of the base year and
the current year as the weights of the items i.e. . So the formula in
this case becomes
f) Kellys Method: It is also known as fixed weight aggregative index. In

this method weights are quantities which may refer to some period, not
necessarily the base year or current year. Thus average quantities of
two or three or more than three years or base or current can be used.
Where q = quantity of any year or average of quantities of any

number years.
g) Walschs Method: This method is modification of Marshall and
Edgeworth. In this method we take the geometric mean of the two

quantities rather than A.M. as the weights of the item for both the years
i.e.,
Example: Construct the index numbers of prices for the year 2010 taking
2009 as the base year form the following data by applying the following:
Laspeyres, Paasches, Bowleys, Fishers, Marshall-Edgeworth, Walschs,
method.
2009 2010
Commodity
Rice 2 8 4 6
Wheat 5 10 6 5
Cotton 4 14 5 10
Dal 2 19 2 13
Solution:
2009 2010
Commodity Price Quantit Price Quantit
P0 y Q0 P1 y Q1
Rice 2 8 4 6 32 16 24 12
Wheat 5 10 6 5 60 50 30 25
Cotton 4 14 5 10 70 56 50 40
Dal 2 19 2 13 38 38 26 26
Total 200 160 130 103
48 6.93 27.72 13.86

50 7.07 42.42 35.35
140 11.832 59.16 47.328
247 15.716 31.43 31.432
160.73 127.11

Laspeyresmethod:
Paasches method:
Bowleys Method:
Fishers Method:
Marshall-Edge worth method:
Walschs method:
Example: Construct the index numbers of prices for the year 1998 taking
1993 as the base year form the following data by applying the following:
Laspeyres, Paasches, Bowleys, Fishers, Marshall-Edgeworth, Walschs,
method.
1993 1998
Items
A 2 40 5 75
B 4 16 8 40
C 1 10 2 24
D 5 25 10 60

Solution:
1993 1998
Item Price Quantity Price Quantit
P0 Q0 P1 y Q1
A 2 40 5 75 200 80 375 150
B 4 16 8 40 128 64 320 160
C 1 10 2 24 20 10 48 24
D 5 25 10 60 250 125 600 300
Total 598 279 1343 634
3000 54.77 273.85 109.54

640 25.30 202.40 101.20
240 15.49 30.98 15.49
1500 38.73 387.30 193.65
894.53 419.88
Laspeyresmethod:
Paasches method:
Bowleys Method:
Fishers Method:

Marshall-Edgeworth method:
Walschs method:
Example: From the following data construct the price index number for the
year 1998 using Kelleys weighted aggregative method.
Average
Items quantity Price in 1995 Price in 1998
consumed
P 60 32 40
Q 40 30 42
R 30 16 24
S 20 40 52
T 10 35 45
Solution:
Average
quantity Price in 1995 Price in 1998
Items consumed P1Q P0Q
P0 P1
Q
P 60 32 40 2400 1920
Q 40 30 42 1680 1200
R 30 16 24 720 480
S 20 40 52 1040 800
T 10 35 45 450 350
Total 6290 4750
Kelleys Index number
SAQ3. From the following data find the weighted index numbers using the
various weighted aggregative methods

Base year Current Year

Items
A 2 40 5 75
B 4 16 8 40
C 1 10 2 24
D 5 25 10 60
SAQ4. Compute price index and quantity index numbers for the year 2002
with 2000 as base year, using Laspeyres. Paasches, Fishers method.
Quantity Expenditure
Commodity
2000 2002 2000 2002
A 100 150 500 900
B 80 100 320 500
C 60 72 150 360
D 30 33 360 297
SAQ5. From the data given below, find x if the ratio between Laspeyres (L)
and Paasches (P) index numbers is L : P : : 28 : 27
Commodities P0 q0 P1 q1
A 1 10 2 5
B 1 5 x 2
9.5 Test of Good Index Number

The consistency and adequacy of an index number formula can be verified
by the following main tests:
1. Order reversal test
2. Time reversal test
3. Factor reversal test
4. Circular test
1. Order reversal test: In this test, the formula of index number should be
such its value remains the same even if we reverse or altered the order
of items. Note that this test is satisfied by all the formulas of index
numbers.

2. Time reversal test: This test is one of the important test for Index
number. It is a test to determine whether the given formula is true in both
forward and backward ways of time that is when the time subscripts of
the formula are reversed.
According to Fisher, The test is that formula for calculating an index
number should be such that ratio between one point of comparison and
other, no matter which of the two is taken as base
Thus, if the time script say price, of any index formula be interchanged
then the resulting index should be the reciprocal of the original index.
That is,
Note: This test is satisfied by most of the formula of index number

except those of Laspeyre and Paasche.
3. Factor reversal Test: This test has been given by Prof. Irving Fisher .
According to him, The formula should permit interchange of two items
without giving inconsistent results, so it ought to permit interchanging the
prices and quantities without giving inconsistent results, i.e., the two
results multiplied together should give the true value ratio, except for a
constant proportionality
That is,
Note: Fishers index satisfies factor reversal test and none of other
formulae satisfies the factor reversal test.
4. Circular test: This test was put forth by Westergaard. According to this
test, the index number formula should be such that it works in a circular
fashion. This means that if an index is computed for the period 1 on the
base period 0, another index is computed for the period 2 on the base
period 1 and another index is computed for the period 0 on the base
period 2, the product of all these indices should be equal to 1. That is,

This test is not satisfied by most of the important index formula i.e.,
Fishers, Laspeyres, Paasches, Marshal and Edgeworths, Drobish and
Bowleys etc.
Example: From the data given in the table construct the Fishers ideal
number and show that it satisfies (1) Time reversal test (2) Factor reversal
test.
Base Year Current year

Items
Price Expenditure Price Expenditure
P 6 50 10 56
Q 2 100 2 120
R 4 60 6 60
S 10 30 12 24
T 3 40 8 30
Solution:
Base Year Current year

Items P1q0 P0q0 P0q1 P1q1
P0 Q0 P1 q1
P 6 50 10 56 500 300 336 560
Q 2 100 2 120 200 200 240 240
R 4 60 6 60 360 240 240 360
S 10 30 12 24 360 300 240 288
T 3 40 8 30 320 120 90 240
Total 1740 1160 1146 1688
Fishers Method:
Now, we know that time reversal formula is satisfied by a formula when
Now, we have to calculate = =

Thus,
=1
Hence, time reversal test is satisfied.

(c) Factor reversal test
This test is satisfied by the formula
Now, we need to calculated =
Therefore,
Example: With the help of following data show that the Time and Factor
reversal tests are satisfied by Fishers Ideal formula for index number
construction
Base year Base year Current year Current year
Commodity
A 6 50 10 56
B 2 100 2 120
C 4 60 6 61
D 8.5 30 12 24
E 8 40 16 22
Solution:
Commodity P0 Q0 P1 Q1 P1Q0 P0Q0 P1Q1 P0Q1
A 6 50 10 56 500 300 560 336
B 2 100 2 120 200 200 240 240
C 4 60 6 61 360 240 366 244
D 8.5 30 12 24 360 255 288 204
E 8 40 16 22 640 320 352 176
Total 2060 1315 1806 1200

we know that time reversal formula is satisfied by a formula when
Now, we have to calculate =
Thus,
Hence the test is verified.

Now, Factor reversal test is satisfied by the formula
Now, we need to calculated =
Therefore,
Example: For the following data show that the simple aggregative method
satisfies the time reversal test and circular test.
2000 2001 2002

Items
P Q P Q P Q
A 12 10 10 9 12 27
B 15 25 7 18 5 12
C 24 30 5 35 9 37
D 5 40 16 45 14 13
E 7 20 8 50 15 43

Solution:
2000 2001 2002
Items
P0 P1 P2
A 12 10 12
B 15 7 5
C 24 5 9
D 5 16 14
E 7 8 15
Total 63 46 55
we know that time reversal formula is satisfied by a formula when
Thus,
(b) Circular test is satisfied by
Thus,
Hence both the tests are verified.

SAQ 6: From the data below, calculate the Fishers Ideal Index and show
that it satisfies time reversal test:
2009 2010
Items
A 12 20 14 5
B 14 13 20 10
C 10 12 15 20
D 6 8 4 10
E 8 5 6 5
9.6 Summary
In this unit, we studied about index number and its different types. We also
studied various tests to check the goodness of index number. The idea of
solving different problems with the help of index numbers is also discussed
here with suitable examples.
9.7 Terminal Questions

1. Compute the price index by applying weighted average of price relatives
method using (a) arithmetic mean (b) geometric mean
Commodity P0 (Rs) Q0(Rs) P1 (Rs)

Sugar 18 20 20
Wheat 12 40 14
Oil 15 10 16
2. Calculate the index number for 2005 with 2000 as base year by using
(a) The simple average of price relatives (b) the weighted average of
price relatives.
Price
Commodity Unit Weight
2000 2005
A Kg. 5 20 45
B Quintal 7 25 32
C Dozen 6 30 45
D Kg. 2 10 18

3. Calculate Kellys weighted price index from the following data:
Quantity Price During

Commodity Unit
Req. Base year Current year
A Kg. 500 5 8
B Ft 2,000 9.5 14.2
C Dozen 50 34 42
D Litre 20,000 12 24
4. Calculate price index for 2000 with 1999 as base year by Laspeyres,
Paasches, Fishers, Marshall-Edge worth method.
1999 20000
Commodities
A 20 8 40 6
B 50 10 60 5
C 40 15 50 15
D 20 20 20 25
5. Construct Fishers Ideal Index number from the following data showing
that it satisfies time reversal and factor reversal tests.
1999 20000
Commodities
A 10 100 12 144
B 15 75 20 120
C 8 80 10 110
D 20 60 25 50
E 50 500 60 540
6. Prepare price index number for 2005 with 2002 as base year from the
following data by using Laspeyres, Paasches, Fishers, Marshall-
Edgeworth method. Also verify that the Factor reversal test and Time
reversal test are satisfied by Fishers formula.
Article-I Article-II Article-III Article-IV
Year
Price Qty. Price Qty. Price Qty. Price Qty.
2002 5 5 7.75 6 9.63 4 12.50 9
2005 6.50 7 8.80 10 7.75 6 12.75 9

9.8 Answers
Self Assessment Questions
1. From the table (1990)= 345, (1991)= 455, (1992)= 575
Price index for 1991 is = 131.88
Price index for 1992is = 166.66
2. Price Index (A.M.) = 104.675

Price Index (G.M.) = 104.57
3. Laspeyresmethod:
Paasches method:
Bowleys Method:
= 124.935
Fishers Method:
Walschs method:

Kelleys Index number:
Where q = (q1+q2)/2
4. We know that expenditure = Price Quantity

So, quantity = expenditure / Price
q0 q1 e0= P0q0 P0 e1= P1q1 P1 P1q0 P0q1
(1) (2) (3) (4) = (3)/(1) (5) (6) = (5)/(2) (7) (8)
100 150 500 5 900 6 600 750
80 100 320 4 500 5 400 400
60 72 150 2.5 360 5 300 180
30 33 360 12 297 9 270 396
= 1,330 = 2,057 = 1,570 = 1,726
Laspeyresmethod: (price index)
Laspeyresmethod: (quantity index)
Paasches method: (price index)
Paasches method: (quantity index)

Fishers Method: (price index)
Fishers Method: (quantity index)
5.
Commodities p0 q0 p1 q1 p1 q0 p0 q0 p1 q1 p0 q1
A 1 10 2 5 20 10 10 5
B 1 5 x 2 5x 5 2x 2
Total 20+5x 15 10+2x 7
Now, by Laspeyres method, we have
And, by Paasches method, we have
Therefore,
L/P = , Given
x=4
6.
2009 2010
Items p1 q0 p0 q0 p1 q1 p0 q1
P0 Q0 P1 Q0
A 12 20 14 5 280 240 420 360
B 14 13 20 10 260 182 300 210
C 10 12 15 20 180 120 300 200
D 6 8 4 10 32 48 40 60
E 8 5 6 5 30 40 30 40
total 782 630 1090 870

Fishers Method: (price index)
Time reversal test is satisfied only when
Now, we have to calculate = =
Thus,
=1
Terminal Questions
1. Price Index (A.M.) = 113.13
Price Index (G.M.) = 113.11
2. Simple average of price relative is
Weighted average of price relative is
3. Kelleys Index number:
4. Laspeyresmethod:
Paasches method:

Fishers Method:
5. Fishers Method:
6. Laspeyresmethod:
Paasches method:
Fishers Method:

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Probability and Statistics Unit 9

Unit 9 Index Number

9.2 Problems in the construction of Index number

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The construction of index number involves a lot of problems for a

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has to be made between Arithmetic mean and Geometric mean.

9.3 Types of Index Number

years price of a particular commodity.

2. Quantity Index number: It measures the change in the quantities of

Where, = quantity index number of the current year on the basis of

the base years quantity of a particular commodity.

= quantity consumed in the base year

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3. Value Index Number: It measures the change in the level of value of

= values of the items consumed in the base year

4. Weighted Index number: It is an index number which is calculated after

Where, = weighted price index of the current year on the basis of

its base years price.

= Index or price relative i.e.

Where, = Price relative of the current year

= Price of the current year

6. Chain Base Index Number: It is the index number computed for

Where, = Link relative of the current year

= Price of the current year

Where, = link relative of the current year

= Price relative of the current year

= Price relative of the immediately preceding year

Where, = Price relative of the current year

= Link relative of the current year

= Price relative of the immediately preceding year

7. Plural Index Number: It is the index number calculated for a number of

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power of a particular community of people during a given period as

9.4 Different methods of computing an Index number

Aggregate Relative Aggregate Relative

9.4.1 Simple Aggregate method

Commodity and unit Price (Rs) of 2010 Price (Rs) of 2011

Solution: Base year for the above example is 2010. It is denoted by . So

Current year is considered as 2011. It is denoted by ,

Therefore, price index number = 117.70

Items Units Prices in 1990 Prices in 1991 Prices in 1992

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= (when G.M. is used)

= Price of the current year

N = Total number of items

Commodities Dal Rice Milk Cheese Bread

Solution: Using Arithmetic mean

So, the price index number is given by

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Using Geometric mean

Price in 1998 Price in 2000 Price relative

Dal 20 25 125 2.0969

The index number is given by

Commodity and Unit Prices 2009 Price 2010

3. Weighted relative method

(when Mean is used)

= (when G.M. is used)

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= price relative of the respective items i.e.

P = Price index or Price relatives as above

= value of the commodities consumed in the base year i.e., or in the