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Vision Institute of Accountancy Indices: Business Mathematics
Vision Institute of Accountancy Indices: Business Mathematics
BUSINESS MATHEMATICS
INDICES
An index number is an attempt to summarize a whole mass of
data into one figure. The single figure shows how one year differs
from another year.
It is a statistical devise used to measure the change in the level
of prices, wages output and other variables at given times,
relative to their level at an earlier time which is taken as the
base for comparison purposes
A simple price index =
Pn
Po
index)
Where pn is the price of a commodity in the current year (the
year for which the price index to be calculated)
Where po is the price of the same commodity in the base year (the
year for comparison purposes)
Similarly Qn and Qo are defined in the same way
AGGREGATE PRICE INDEX NUMBERS AND QUANTITY
INDEX NUMBERS
PRICE INDEX
QUANTITY INDEX
LASPEYRES
pnqo 100
qnpo 100
Poqo
qopo
INDEX
PAASCHES
pn qn 100
qn qn 100
Po qn
qo pn
INDEX
Value index =
p q
Pq
n n
100
o o
w
pn
po
100
1985
1986
1987
1988
Previous
index
100
Recalculated index
100
104
112
104
108
112
108
109
112
109
112
112
112
120
112
100 = 89.3
100 = 92.9
100 = 96.4
100 = 97.3
100 = 100
100 = 107.1
1991
1992
125
125
140
112
140
112
100 = 111.6
100 = 125.0
100
198
7
108
198
8
109
198
9
112
199
0
120
199
1
125
104
Recalculated
Fixed
based
chain
based index
index
100
100(1985 base
year
104
100
100
100
100
104
100
100 = 104
104
108
104
108
100
100 = 108
103.8
109
108
100.9
112
109
109
100
100
109
100
100
100
112
100
100 = 112
102.8
120
112
120
100
100 = 120
107.1
125
120
104.2
125
100
100 = 125
199
2
140
140
120
100 = 112
140
100
100 = 140
W 100
W
pn
po
p q
p q
n n
100
0 n
Real earnings
1
2
5,000
5,500
100
120
5000 = 5000
5,500
100
120
4,583.3
3
6,000
140
6,000
100
140
4,285.7
4
6,500
170
6,500
100
170
3,823.5
5
7,200
200
7,200
100
200
3,600.0
The technique of index number construction
When preparing index numbers it is important to define
a) The exact purpose of the index
b) How the items are to be selected
c) The choice of the weights
d) The choice of the base
e) The type of average to be used
The base year should be as close to the normal trend as possible.
The best methods should be used for collection of data. The
items should be selected in such a way that they are a fair
representation of all the relevant items.
Due consideration should be given to the weighting of all items
selected
The Geometric Index (Industrial Share index)
This index is an index of 30 selected top industrial companies. It
is calculated by taking an unweighted geometric mean of the
price relatives of the selected shares.
Example
The share prices of ordinary shares of four companies on 1 st
January 1990 and 1st January 1991 were as follows.
Share
Price
on Price
on
1.1.1990
Compan Shs 10
yA
Compan Shs 12
yB
Compan Shs 20
yC
Compan Shs 5
yD
1.1.1991
Shs 12
Shs 15
Shs 25
Shs 6
12 15 25 6 4
10 12 20 5
1.225
27000
12000
1
4
2.25 4
1
p p
p q
n
100
qn
qn
100