INDEX NUMBERS

Presented by:
Rashmi Ranjan Malla
 CONTENTS

 Introduction
 Uses of index numbers
 Understand the difference between a weighted and
an unweighted index.
 Construct and interpret a Laspeyres 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.
An index number measures
the value of a variable
relative to its value during a
base period (the percent
change from a base period)

Index Number = (Value / Base

Value) x 100
 Classification of Index
Numbers

Price index numbers

Quantity index numbers
Value index numbers
Special purpose index number
Methods of constructing Index
Numbers

They can be grouped into two heads:

a)Unweighted indeces
b)Weighted indeces
 .

Unweighted Weighted

Simple Simple
Aggregativ Average or Weighted Weighted
e Relatives Aggregativ Average of
e Relatives
Advantages or Uses OF INDEX
NUMBERS
o Measurement of change in the price level
o Useful to government
o Knowledge of change in standard of living
o Information regarding foreign trade
o Index numbers can also be used to study the
relative changes on the basis of geographical
locations or some other characteristics
Unweighted Index Numbers

P 01 =
∑ P1
×100
∑P 0

∑P 1

∑P 0
Illustration: From the following data
construct an index for 2009 taking 2008 as
base.
Commodity Price in 2008 ( Rs.) Price in 2009 ( Rs.)

A 50 70

B 40 60

C 80 90

D 110 120

E 20 20
Solution:

P 01 =
∑ P 1
×100
∑P 0

It means that as compared to 2008,in 2009 there is net increase in the prices of
commodities included in the index to the extent of 20%
 *Simple Average of Price relative Method:

Under this method ,the price relatives for each

commodity are calculated and average is found
out.
 P1 
∑
 P ×100 

 0 
P01 =
N
 Where N is the number of items from which the index
number is constructed.

When geometric mean is used the formula would

be

 P1 
∑ log P ×100 
 0 
log P01 =
N
 Illustration:
From the following data ,construct an index for
2008 taking 2009 as base by the average of
relatives method using arithmetic mean

Commodity Price in 2007( Rs.) Pice in 2008 (Rs.)

A 50 70
B 40 60
C 80 90
D 110 120
E 20 20
 Solution:
Commodity Price in Pice in 2008 Price Relatives
2007( PRs.)
0
(Rs.) P1 P1
× 100
P0
A 50 70 140.0
B 40 60 150.0
C 80 90 112.5
P
D 110 120 109.1
E 20 20 100.0

 P1 
∑ P ×100  = 611 .6
 0 

 P1 
∑
P ×100 

 0 
P01 = =122 .32
N
 Weighted Index Numbers
∗ An index number in which the component items are
weighted according to some system of weights
reflecting their relative importance. In one sense
nearly all index numbers are weighted by implication;
for example, an index number of prices amalgamates
prices per unit of quantity and the size of these units
may vary from one commodity to another in such a
way as to constitute weighting.
Weighted Index Numbers are
of two types
1) Weighted Aggregative Indices
2) Weighted Average of Relatives
 Weighted Aggregative
Indices
∗ These indices are similar to simple aggregative
type with the fundamental difference that weights
are assigned explicitly to the various items
included in the index. Various methods of constructing
Weighted Aggregative Indices are:

∗ Laspeyres Method
∗ Paasche’s Method
∗ Drobish & Bowley’s Method
∗ Fisher’s Ideal Method
∗ Marshall Edge worth Method
∗ Walsh Method
∗ Kelly’s Method.
 Laspeyres Method
In this method ,base year quantity are taken as
weights. The formula for constructing the index is:

p01 =
∑ pq
1 0
×100
∑p q
0 0

Where,
Price in current year
P1
Price in base year
P0 Quantity in the base year
q0
 Paasche’s Index
q1

∑ p q × 100
1 1

P0 1
∑pq0 1

Steps for constructing the paasches index are same as

those taken in constructing laspayre’s index with only
difference that the price of each commodity in each
year is multiplied by the quantity of that commodity in
the current year rather than by the quantity in the base
year.
 Bowley Drobish Method
This method is the simple arithemetic mean of
Laspcyre’s and Paasche’s indices.

The formula for constructing Bowley-Drobish index is:

∑p q1 0
+ ∑ pq
1 1

P 01 = ∑p q0 0
∑p q
0 1
×100
2
L +P
P 01 =
2
Where,
L=Laspeyre’s index
P=Paasche’s index
 Fisher’s Ideal Index

Prof. Irving fisher has given a number of

formulae for constructing index number .This
mehod is the geometric mean of Laspeyre’s
and Passche’s indices.
The formula for constructing the index is:
P 01 =
∑ p q × ∑ p q × 100
1 0 1 1

∑ pq ∑ p q
o 0 0 1
 Marshall-Edgeworth Method

In this method also both the current as well as

base year price and quantities are considered.
The formula for constructing the index is:

P 01 = ∑ p q + ∑ p q × 100
1 0 1 1

∑ p q +∑ p q
0 0 0 1
 Kelly’s Method
Truman L.kelly has suggested the following
formulla for constructing index number :

P 01 = ∑ p q × 100
1

∑pq 0
 Illustration:
From the data given below ,construct index number of
prices for 2008 with 2002 as base ,using Laspeyres
Method
Paasche’s Method
Drobish & Bowley’s Method
Fisher’s Ideal Method
Marshall Edge worth Method
Walsh Method
Kelly’s Method.
Commodity Price Quantity Price Quantity

A 2 10 4 16
B 5 10 6 5
C 4 14 5 10
D 2 19 2 13
 Solution:

Commodit
y P0 q0 P1 q1 P0 q0 P0 q 1
P1 q0 P1 q 1

A 2 8 4 6 32 16 24 12
B 5 10 6 5 60 50 30 25
C 4 14 5 10 70 56 50 40
D 2 19 2 13 38 38 26 26
∑P0q0 ∑ P0q1 ∑ P q0 ∑ P q 1
1 1
=130 =
=200 =160 103
 ∑pq
P 01
1 0
× 100
∑pqo 0

200
= × 100 = 125
160

∑ pq + ∑ pq
1 0 1 1

P 01 ∑ pq ∑pq
0 0
× 100
0 1

2
130
= × 100 = 126.21
103
 200 130
∑ pq + ∑ pq
1 0 1 1 +
P 01 ∑pq ∑pq
0 0 0 1 = 160 103 ×100 = 125.6
× 100 2
2

4. Fisher Ideal Index

P 01 ∑ p q × ∑ p q ×100
1 0 1 1

∑ pq ∑ p q
o 0 0 1

200 130
= × × 100 = 1.578× 100× 100 = 126.6
160 102
5. Marshall-Edgeworth Index

P 01
∑ p q + ∑ p q ×100
1 0 1 1

∑ p q +∑ p q
0 0 0 1

200 +130
= ×100 =125 .47
160 +103
 Quantity or volume index
numbers
Price indices measures changes in the price level of
certain commodities .On the other hand quantity or
volume index numbers measures the changes in the
physical volume of goods produced ,distributed or
consumed .These indices are important indicators of
the level of output in the economy or in part of it

If a quantity index number is prepared by using the

Q 01 =
∑
laspeyers method it wouldqbe
1 p0:
×100
∑q 0 p0
 .

∗ When Paasche’s formula is used

Q 01 =
∑ qp
× 100
1 1

∑q p 0 1

∗ When fisher formula is used

Q 01 =
∑ q p × ∑ q p × 100
1 0 1 1

∑q p ∑q p
0 1 0 1
Value index numbers

Value means price times quantity .Thus a value V

is the sum of the value of a given year divided by
sum of the values for the base year. The formula,
therefore is:

V=
∑ pq 1 1
×100
∑pq 0 0

Where V= Value index

 The chain index numbers

When this method is used the comparisons are not made

with a fixed base, rather the base changes from year to
year. For example, for 2007,2006 will be the base ; for
2006, 2005 will be the same and so on.

× year
Average link relative of current Chain index for
previous year
=
100
REFRENCES:
S.P GUPTA
B.M AGARWAL
K.K KHANNA
THANK YOU