MODULE 3 18BS5AI01 Statistics Using R

Statistics using R
Statistics using R 1
MODULE-03 :INDEX NUMBERS
Index Numbers
Construction of index numbers
Fixed and chain base index numbers
Weighted index numbers
Standard index numbers
Tests for index numbers
Cost of living index number and its construction.
Introduction
 An index number is a statistical device for comparing the general level of
magnitude of a group of related variables in two or more situation.
 If we want to compare the price level of 2000 with what it was in 1990, we
shall have to consider a group of variables such as price of wheat, rice,
vegetables, cloth, house rent etc.,
 If the changes are in the same ratio and the same direction, we face no
difficulty to find out the general price level.
 But practically, if we think changes in different variables are different and that
too, upward or downward, then the price is quoted in different units i.e milk
for litre, rice or wheat for kilogram, rent for square feet, etc
Introduction
 We want one figure to indicate the changes of different commodities as a whole.
This is called an Index number.
 Index Number is a number which indicate the changes in magnitudes.
 M.Spiegel says, “ An index number is a statistical measure designed to show
changes in variable or a group of related variables with respect to time,
geographic location or other characteristic”.
 In general, index numbers are used to measure changes over time in magnitude
which are not capable of direct measurement.

Introduction
On the basis of study and analysis of the definition given
above, the following
characteristics of index numbers are apparent.
1. Index numbers are specified averages.
2. Index numbers are expressed in percentage.
3. Index numbers measure changes not capable of direct

measurement.
4. Index numbers are for comparison.

Uses of Index numbers:
Index numbers are indispensable tools of economic and business analysis.
They are particular useful in measuring relative changes. Their uses can be
appreciated by the following points.
1. They measure the relative change.
2. They are of better comparison.
3. They are good guides.
4. They are economic barometers.
5. They are the pulse of the economy.
6. They compare the wage adjuster.
7. They compare the standard of living.
8. They are a special type of averages.
9. They provide guidelines to policy.
10. To measure the purchasing power of money.
Types of Index numbers:
There are various types of index numbers, but in brief, we
shall take three kinds and they are
1. Price Index
2. Quantity Index and
3. Value Index
1. Price Index:
 For measuring the value of money, in general, price index is used. It is an index
number which compares the prices for a group of commodities at a certain time as at a
place with prices of a base period.
 There are two price index numbers such as whole sale price index numbers and retail
price index numbers.
 The wholesale price index reveals the changes into general price level of a country, but
the retail price index reveals the changes in the retail price of commodities such as
consumption of goods, bank deposits, etc.
2. Quantity Index:
Quantity index number is the changes in the volume of goods produced or

consumed.
 They are useful and helpful to study the output in an economy.
3. Value Index:
Value index numbers compare the total value of a certain period with total
value in the base period. Here total value is equal to the price of commodity
multiplied by the quantity consumed.
Notation:
For any index number, two time periods are needed for comparison. These are called the
Base period and the Current period. The period of the year which is used as a basis for
comparison is called the base year and the other is the current year.
The various notations used are as given below:
𝑃1 = Price of current year 𝑃0 = Price of base year
𝑞1 = Quantity of current year 𝑞0 = Quantity of base year
Problems in the construction of index numbers:
No index number is an all purpose index number. Hence, there are many
problems involved in the construction of index numbers, which are to be tackled by
an economist or statistician.
They are
1. Purpose of the index numbers
2. Selection of base period
3. Selection of items
4. Selection of source of data
5. Collection of data
6. Selection of average
7. System of weighting
Method of construction of index numbers:
Index numbers may be constructed by various methods as shown below:
Simple Aggregate Index Number:
This is the simplest method of construction of index numbers. The price of the
different commodities of the current year are added and the sum is divided by the
sum of the prices of those commodities by 100. Symbolically,
σ 𝑃1
Simple aggregate price index = 𝑃01 = σ × 100
𝑃0
Where , σ 𝑃1 = total prices for the current year
σ 𝑃0 = Total prices for the base year
Problems
Problem 1: Calculate index numbers from the following data by simple aggregate
method taking prices of 2000 as base
Commodity Price per unit
Commodity Price per unit
(in Rupees)
(in Rupees)
2000 2004
2000 2004
(𝑃0 ) (𝑃1 )
A 80 95 A 80 95
B 50 60 B 50 60
C 90 100 C 90 100
D 30 45 D 30 45
Total 250 300
Solution:
σ𝑃
Simple aggregate Price index = 𝑃01 = σ 𝑃1 × 100
0
300
= 250 × 100 = 120
Simple Average Price Relative index:
In this method, first calculate the price relative for the various commodities
and then average of these relative is obtained by using arithmetic mean and
geometric mean. When arithmetic mean is used for average of price relative, the
formula for computing the index is
𝑃1
σ ×100
𝑃0
Simple average of price relative by arithmetic mean = 𝑃01 =
𝑛
𝑃1 = Prices of current year
𝑃0 = Prices of base year
n = Number of items or commodities
when geometric mean is used for average of price relative, the formula for obtaining
the index is
Simple average of price relative by geometric Mean = 𝑃01 =
𝑃1
σ 𝑙𝑜𝑔 ×100
𝑃0
𝐴𝑛𝑡𝑖𝑙𝑜𝑔
𝑛
Problem
Problem 2 From the following data, construct an index for 1998 taking 1997 as base by the
average of price relative using (i) arithmetic mean and (ii) Geometric mean
Commodity Price in 1997 Price in 1998
A 50 70
B 40 60
C 80 100
D 20 30
Solution:
(i) Price relative index number using arithmetic mean
Price in 1997 Price in 1998 𝑃1
× 100
Commodity 𝑃0
(𝑃0 ) (𝑃1 )
A 50 70 140
B 40 60 150
C 80 100 125
D 20 30 150
Total 565
𝑃1
σ ×100 565
𝑃0
Simple average of price relative by arithmetic mean = 𝑃01 = 𝑛
= 4
= 141.25
Problem
(ii) Price relative index number using Geometric Mean
Commodity Price in 1997 Price in 1998 𝑃1 𝑃1
× 100 𝑙𝑜𝑔 × 100
𝑃0 𝑃0
(𝑃0 ) (𝑃1 )
A 50 70 140 2.1461
B 40 60 150 2.1761
C 80 100 125 2.0969
D 20 30 150 2.1761
Total 8.5952
𝑃1
σ 𝑙𝑜𝑔 ×100
𝑃0
Simple average of price relative by geometric Mean = 𝑃01 = 𝐴𝑛𝑡𝑖𝑙𝑜𝑔 𝑛
8.5952
= 𝐴𝑛𝑡𝑖𝑙𝑜𝑔 4
= 𝐴𝑛𝑡𝑖𝑙𝑜𝑔 2.1488
= 140.9
Weighted aggregate index numbers:
In order to attribute appropriate importance to each of the items used in an
aggregate index number some reasonable weights must be used. There are various
methods of assigning weights and consequently a large number of formulae for
constructing index numbers have been devised of which some of the most
important ones are
1. Laspeyre’s method
2. Paasche’s method
3. Fisher’ s ideal Method
4. Bowley’ s Method
5. Marshall- Edgeworth method
6. Kelly’ s Method
1. Laspeyre’ s method:
The Laspeyres price index is a weighted aggregate price index, where the
weights are determined by quantities in the based period and is given by
σ𝑝 𝑞
Laspeyres price index = 𝑃01 𝐿 = σ 𝑝1𝑞0 × 100
0 0
2. Paasche’ s method:
The Paasche’ s price index is a weighted aggregate price index in which the weight
are determined by the quantities in the current year. The formulae for constructing the
index is
σ𝑝 𝑞
Paasche’ s price index= 𝑃01 𝑃 = σ 𝑝1𝑞1 × 100
0 1
Where
𝑃0 = Price for the base year 𝑃1 = Price for the current year
𝑞0 = Quantity for the base year 𝑞1 = Quantity for the current year
3. Fisher’ s ideal Method:
Fisher’ s Price index number is the geometric mean of the Laspeyres and Paasche
indices Symbolically
Fisher’ s Price index number = 𝑃01 𝐹 = 𝐿 × 𝑃
σ 𝑝1 𝑞0 σ𝑝 𝑞
= σ 𝑝0 𝑞0
× σ 𝑝1𝑞1 × 100
0 1
It is known as ideal index number because

(a) It is based on the geometric mean
(b) It is based on the current year as well as the base year
(c) It conform certain tests of consistency
(d) It is free from bias.
4.Bowley’ s Method:
Bowley’ s price index number is the arithmetic mean of Laspeyre’ s and Paasche’ s
method. Symbolically
𝐿+𝑃
Bowley’ s price index number = 𝑃01 𝐵 = 2
1 σ 𝑝1 𝑞0 σ 𝑝1 𝑞1
= + × 100
2 σ 𝑝0 𝑞0 σ 𝑝0 𝑞1
5. Marshall- Edgeworth method:
This method also both the current year as well as base year prices and
quantities are considered. The formula for constructing the index is
σ 𝑞0 +𝑞1 𝑝1
Marshall- Edgeworth price index = 𝑃01 𝑀𝐸 = σ × 100
𝑞0 +𝑞1 𝑝0
σ 𝑝 𝑞 +σ 𝑝 𝑞
= σ 𝑝1𝑞0+σ 𝑝1 𝑞1 × 100
0 0 0 1
6. Kelly’ s Method:
Kelly has suggested the following formula for constructing the index
number
σ 𝑝1 𝑞
Kelly’s Price index number = 𝑃01 𝐾 = σ × 100
𝑝0 𝑞
𝑞0 +𝑞1
Where 𝑞 =
2
Here the average of the quantities of two years is used as weights.
Problem
Problem 3: Construct price index number from the following data by applying
Commodity 2000 2001
1. Laspeyere’ s Method Price Qty Price Qty
A 2 8 4 5
2. Paasche’ s Method B 5 12 6 10
C 4 15 5 12
3. Fisher’ s ideal Method D 2 18 4 20
Solution: Commodity 𝒑𝟎 𝒒𝟎 𝒑𝟏 𝒒𝟏 𝒑𝟎𝒒𝟎 𝒑𝟎𝒒𝟏 𝒑𝟏𝒒𝟎 𝒑𝟏𝒒𝟏

A 2 8 4 5 16 10 32 20
B 5 12 6 10 60 50 72 60
C 4 15 5 12 60 48 75 60
D 2 18 4 20 36 40 72 80
172 148 251 220
σ𝑝 𝑞 251
Laspeyres price index = 𝑃01 𝐿 = σ 𝑝1𝑞0 × 100 = 172 × 100 = 145.93
0 0
σ𝑝 𝑞 220
Paasche’ s price index= 𝑃01 𝑃 = σ 𝑝1𝑞1 × 100 = 148 × 100 = 148.7
0 1
Problem
= 145.9 × 148.7
= 21695.33 = 147.3
Or
σ 𝑝1 𝑞0 σ 𝑝1 𝑞1
Fisher’ s Price index number = σ 𝑝0 𝑞0
×σ × 100
𝑝0 𝑞1
251 220
= × × 100
172 146
= 1.459 × 1.487 × 100 = 2.170 × 100

= 1.473 × 100 = 147.3
Interpretation:
The results can be interpreted as follows:
If 100 rupees were used in the base year to buy the given commodities, we have to use Rs 145.90 in the
current year to buy the same amount of the commodities as per the Laspeyre’ s formula. Other values
give similar meaning.
Problem
Problem 4: Calculate the index number from the following data by applying
Base year Current year
(a) Bowley’ s price index Commodity Quantity Price Quantity Price
(b) Marshall- Edgeworth price index A 10 3 8 4
B 20 15 15 20
C 2 25 3 30
Solution:
Commodit 𝑞0 𝑝0 𝑞1 𝑝1 𝑝 0 𝑞0 𝑝 0 𝑞1 𝑝 1 𝑞0 𝑝 1 𝑞1
y
A 10 3 8 4 30 24 40 32
B 20 15 15 20 300 225 400 300
C 2 25 3 30 50 75 60 90
380 324 500 422
𝐿+𝑃
a) Bowley’ s price index number = 𝑃01 𝐵 =
2
Problem
1 σ 𝑝1 𝑞0 σ 𝑝1 𝑞1
= + × 100
2 σ 𝑝0 𝑞0 σ 𝑝0 𝑞1
1 500 422
= + × 100
2 380 324
1
= 2 1.316 + 1.302 × 100
1
= 2.168 × 100
2
= 1.309 × 100 = 130.9
σ 𝑞 +𝑞 𝑝1
b) Marshall- Edgeworth price index Number = 𝑃01 𝑀𝐸 = σ 𝑞0 +𝑞1 × 100
0 1 𝑝0
500 422
= + × 100
380 324
922
= × 100
704
= 131.0
Problem
Problem 5: Calculate a suitable price index from the following data
Commodity Quantity Price
1996 1997
A 20 2 4
B 15 5 6
C 8 3 2
Solution:
Here the quantities are given in common we can use Kelly’ s index price
number and is given by
σ𝑝 𝑞
Kelly’s Price index number = 𝑃01 𝐾 = σ 𝑝1𝑞 × 100
0
Kelly’s Price index number
Commodity 𝑞 𝑝0 𝑝1 𝑝0 𝑞 𝑝1 𝑞
A 20 2 4 40 80
σ 𝑝1 𝑞
= 𝑃01 𝐾 = × 100
B 15 5 6 75 90 σ 𝑝0 𝑞
C 8 3 2 24 16 186
= 139 × 100 = 133.81
Total 139 186
Weighted Average of Price Relative index:
When the specific weights are given for each commodity, the weighted index
number is
calculated by the formula.
σ 𝑝𝑤
Weighted Average of Price Relative index = σ𝑤
Where 𝑤 = the weight of the commodity

𝑝1
𝑃 = the price relative index = × 100
𝑝0
When the base year value 𝑃0𝑞0 is taken as the weight 𝑖. 𝑒. 𝑊 = 𝑃0𝑞0 then the
formula is
𝑝1
σ ×100 ×𝑝0 𝑞0
𝑝0
Weighted Average of Price Relative index = σ 𝑝0 𝑞0
σ 𝑝1 𝑞0
= σ 𝑝0 𝑞0
× 100
This is nothing but Laspeyre’ s formula.
Weighted Average of Price Relative index:
When the weights are taken as 𝑤 = 𝑝0𝑞1, the formula is
𝑝1
σ ×100 ×𝑝0 𝑞1
𝑝0
Weighted Average of Price Relative index = σ 𝑝0 𝑞1
σ 𝑝1 𝑞1
= σ 𝑝0 𝑞1
× 100
This is nothing but Paasche’ s Formula.
Problem
Problem 6 Compute the weighted index number for the following data.
Commodity Price Weight
Current year Base year
A 5 4 60
B 3 2 50
C 2 1 30
Solution:
P1 P0
Commodity W 𝑝 PW
𝑃 = 𝑝1 × 100
0
A 5 4 60 125 7500
B 3 2 50 150 7500
C 2 1 30 200 6000
140 21000
σ 𝑝𝑤
Weighted Average of Price Relative index = σ𝑤
21000
= = 150
140
Quantity or Volume index number:
Price index numbers measure and permit comparison of the price of certain goods. On
the other hand, the quantity index numbers measure the physical volume of production,
employment and etc. The most common type of the quantity index is that of quantity
produced.
σ𝑞 𝑝
Laspeyre’s quantity index number = 𝑄01 𝐿 = σ 𝑞1 𝑝0 × 100
0 0
σ𝑞 𝑝
Paasche’ s quantity index number = 𝑄01 𝑃 = σ 𝑞1 𝑝1 × 100
0 1
Fisher’ s quantity index number = 𝑄01 𝐹 = 𝐿 × 𝑃

σ 𝑞1 𝑝0 σ𝑞 𝑝
= σ 𝑞0 𝑝0
× σ 𝑞1 𝑝1 × 100
0 1
These formulae represent the quantity index in which quantities of the different
commodities are weighted by their prices.
Problem
Problem 7 From the following data compute quantity indices by
(i) Laspeyre’ s method, (ii) Paasche’ s method and (iii) Fisher’ s method.
2000 2002
Commodity Price Total value Price Total value
A 10 100 12 180
B 12 240 15 450
C 15 225 17 340
Solution:
Here instead of quantity, total values are given. Hence first find quantities of base year and
current year,
𝑡𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒
i.e., Quantity = 𝑝𝑟𝑖𝑐𝑒
Problem
Commodity 𝑝0 𝑞0 𝑝1 𝑞1 𝑝0𝑞0 𝑝0𝑞1 𝑝1𝑞0 𝑝1𝑞1
A 10 10 12 15 100 150 120 180

B 12 20 15 30 240 360 300 450
C 15 15 17 20 225 300 255 340
565 810 675 970
σ 𝑞1 𝑝0 810
Laspeyre’s quantity index number = 𝑄01 𝐿 = σ × 100 = × 100 = 143.4
𝑞0 𝑝0 565
σ𝑞 𝑝 970
Paasche’ s quantity index number = 𝑄01 𝑃 = σ 𝑞1 𝑝1 × 100 = 675 × 100 = 143.7
0 1
Fisher’ s quantity index number = 𝑄01 𝐹 = 𝐿 × 𝑃 = 143.4 × 143.7 = 143.6
σ 𝑞1 𝑝0 σ𝑞 𝑝 810 970
(Or) 𝑄01 𝐹 = σ 𝑞0 𝑝0
× σ 𝑞1 𝑝1 × 100 = × × 100 = 143.4 × 143.7 × 100
0 1 565 675
= 1.436 × 100 = 143.6

Tests of Consistency of index numbers:
Several formulae have been studied for the construction of index number.
The question arises as to which formula is appropriate to a given problem. A
number of tests been developed and the important among these are
1. Unit test
2. Time Reversal test
3. Factor Reversal test.
1. Unit test:
The unit test requires that the formula for constructing an index should
be independent of the units in which prices and quantities are quoted. Except for
the simple aggregate index (unweighted), all other formulae discussed in this
chapter satisfy this test.
2. Time Reversal test:
Time Reversal test is a test to determine whether a given method will work both ways
in time, forward and backward. In the words of Fisher, “the formula for calculating the
index number should be such that it gives the same ratio between one point of comparison
and the other, no matter which of the two is taken as base”. Symbolically, the following
relation should be satisfied.
𝑃01 × 𝑃10 = 1
Where P01 is the index for time ‘1’ as time ‘0’ as base and P10 is the index for time ‘0’
as time ‘1’ as base. If the product is not unity, there is said to be a time bias in the method.
Fisher’ s ideal index satisfies the time reversal test.
2. Time Reversal test:
𝑃01 = ×
σ 𝑞0 𝑞1 σ 𝑝0 𝑞0
𝑃10 = ×
σ 𝑝1 𝑞0 σ𝑝 𝑞 σ𝑞 𝑞 σ𝑝 𝑞
Then 𝑃01 × 𝑃10 = σ 𝑝0 𝑞0
× σ 𝑝1𝑞1 × σ 𝑝0 𝑞1 × σ 𝑝0𝑞0
0 1 1 1 1 0
Therefore, Fisher ideal index satisfies the time reversal test.
3. Factor Reversal test:
Another test suggested by Fisher is known as factor reversal test. It holds that the product
of a price index and the quantity index should be equal to the corresponding value index. In
the words of Fisher, “Just as each formula should permit the interchange of the two times
without giving inconsistent results, so it ought to permit interchanging the prices and
quantities without giving inconsistent result, i.e., the two results multiplied together should
give the true value ratio.
In other word, if 𝑃01 represent the changes in price in the current year and 𝑄01
represent the changes in quantity in the current year, then
σ 𝑝1 𝑞1
𝑃01 × 𝑄01 =
σ 𝑝0 𝑞0
3. Factor Reversal test:
Thus based on this test, if the product is not equal to the value ratio, there is an error in
one or both of the index number. The Factor reversal test is satisfied by the Fisher’ s ideal index.
σ 𝑝1 𝑞0 σ𝑝 𝑞
i.e., 𝑃01 = σ 𝑝0 𝑞0
× σ 𝑝1𝑞1
0 1
σ 𝑞1 𝑝0 σ𝑞 𝑝
𝑄01 = σ 𝑞0 𝑝0
× σ 𝑞1 𝑝1
0 1
σ 𝑝1 𝑞0 σ𝑝 𝑞 σ𝑞 𝑝 σ𝑞 𝑝
Then 𝑃01 × 𝑄01 = σ 𝑝0 𝑞0
× σ 𝑝1𝑞1 × σ 𝑞1 𝑝0 × σ 𝑞1 𝑝1
0 1 0 0 0 1
σ 𝑝1 𝑞1 2 σ𝑝 𝑞
= σ 𝑝0 𝑞0
= σ 𝑝1𝑞1
0 0
σ𝑝 𝑞
Since Then 𝑃01 × 𝑄01 = σ 𝑝1𝑞1 , the factor reversal test is satisfied by the Fisher’s ideal
0 0
index.
Problem
Problem 8 Construct Fisher’ s ideal index for the Following data. Test whether it
satisfies time reversal test and factor reversal test.
Base year Current year
Commodity Quantity Price Quantity Price
A 12 10 15 12
B 15 7 20 5
C 5 5 8 9
Solution:
Commodity q0 p0 q1 p1 p0q0 p0q1 p1q0 p1q1
A 12 10 15 12 120 150 144 180
B 15 7 20 5 105 140 75 100
C 5 5 8 9 25 40 45 72
250 330 264 352
Problem
= σ 𝑝0 𝑞0
×σ × 100
𝑝0 𝑞1
264 352
= × × 100
250 330
= 1.056 × 1.067 × 100

= 1.127 × 100
= 1.062 × 100 = 106.2
Problem
Time Reversal test:
Time Reversal test is satisfied when 𝑃01 × 𝑃10 = 1
σ 𝑝1 𝑞0 σ 𝑝1 𝑞1 264 353
𝑃01 = × = ×
σ 𝑝0 𝑞0 σ 𝑝0 𝑞1 250 330
σ 𝑞0 𝑞1 σ 𝑝0 𝑞0 330 250
𝑃10 = × ×
σ 𝑝1 𝑞1 σ 𝑝1 𝑞0 352 264
σ 𝑝1 𝑞0 σ𝑝 𝑞 σ𝑞 𝑞 σ𝑝 𝑞
Then 𝑃01 × 𝑃10 = σ 𝑝0 𝑞0
× σ 𝑝1𝑞1 × σ 𝑝0 𝑞1 × σ 𝑝0𝑞0
0 1 1 1 1 0
264 353 330 250

= × × ×
250 330 352 264
= 1=1
Hence Fisher ideal index satisfy the time reversal test.

Problem
Factor Reversal test:
σ𝑝 𝑞
Factor reversal test is satisfied when 𝑃01 × 𝑄01 = σ 𝑝1𝑞1
0 0
σ 𝑝1 𝑞0 σ𝑝 𝑞 264 352
Now 𝑃01 = σ 𝑝0 𝑞0
× σ 𝑝1 𝑞1 = ×
0 1 250 330
σ 𝑞1 𝑝0 σ𝑞 𝑝 330 352
𝑄01 = σ 𝑞0 𝑝0
× σ 𝑞1 𝑝1 = ×
0 1 250 264
σ 𝑝1 𝑞0 σ𝑝 𝑞 σ𝑞 𝑝 σ𝑞 𝑝
Then 𝑃01 × 𝑄01 = σ 𝑝0 𝑞0
× σ 𝑝1𝑞1 × σ 𝑞1 𝑝0 × σ 𝑞1 𝑝1
0 1 0 0 0 1
264 352 330 352

= × × ×
250 330 250 264
352 2
= 250
352 σ 𝑝1 𝑞1
= = σ 𝑝0 𝑞0
250
Hence Fisher ideal index number satisfy the factor reversal test.
Consumer Price Index:
 Consumer Price index is also called the cost of living index. It represents the average
change over time in the prices paid by the ultimate consumer of a specified basket of
goods and services.
 A change in the price level affects the costs of living of different classes of people
differently. The general index number fails to reveal this. So there is the need to construct
consumer price index.
 People consume different types of commodities. People’ s consumption habit is also
different from man to man, place to place and class to class i.e., richer class, middle class
and poor class.
 The scope of consumer price is necessary, to specify the population group covered. For
example, working class, poor class, middle class, richer class, etc and the geographical
areas must be covered as urban, rural, town, city etc.
Use of Consumer Price index:
The consumer price indices are of great significance and is given
below.
1. This is very useful in wage negotiations, wage contracts and
dearness allowance adjustment in many countries.
2. At government level, the index numbers are used for wage policy,
price policy, rent control, taxation and general economic policies.
3. Change in the purchasing power of money and real income can be
measured.
4. Index numbers are also used for analyzing market price for
particular kinds of goods and services.
Method of Constructing Consumer price index:
There are two methods of constructing consumer price index. They are
1. Aggregate Expenditure method (or) Aggregate method.
2. Family Budget method (or) Method of Weighted Relative method.
1. Aggregate Expenditure method:
This method is based upon the Laspeyre’ s method. It is widely used. The quantities of
commodities consumed by a particular group in the base year are the weight.
σ𝑝 𝑞
The formula is Consumer Price Index number = σ 𝑝1𝑞0 × 100
0 0
Method of Constructing Consumer price index:
2. Family Budget method or Method of Weighted Relatives:
This method is estimated an aggregate expenditure of an average family

on various items and it is weighted. The formula is
σ 𝑝𝑤
Consumer Price index number = σ𝑤
𝑝1
Where 𝑃 = × 100 for each item. 𝑤 = value weight (i.e) 𝑝0 𝑞0
𝑝0
“Weighted average price relative method” which we have studied before

and “Family Budget method” are the same for finding out consumer price
index.
Problem
Problem 9 Construct the consumer price index number for 1996 on the basis of 1993
from the following data using Aggregate expenditure method.
Price in
Commodity Quantity consumed 1993 1996
A 100 8 12
B 25 6 7
C 10 5 8
D 20 15 18
Solution:
Commodity q0 p0 p1 p0q0 p1q0
Consumer price index by Aggregate
A 100 8 12 800 1200
expenditure method
B 25 6 7 150 175 σ 𝑝1 𝑞0
= × 100
σ 𝑝0 𝑞0
C 10 5 8 50 80
1815
D 20 15 18 300 360
= × 100
1300
Total 1300 1815
= 139.6
Problem
Problem 10 Calculate consumer price index by using Family Budget method for year
1993 with 1990 as base year from the following data.
Price in
Items Weights 1990 1993
(Rs.) (Rs.)
Food 35 150 140
Rent 20 75 90
Clothing 10 25 30
Fuel and lighting 15 50 60
Miscellaneous 20 60 80
Solution:
P0 P1 𝑝1
𝑃= × 100
Items W 𝑝0 PW
Food 35 150 140 93.33 3266.55

Rent 20 75 90 120.00 2400.00
Clothing 10 25 30 120.00 1200.00
Fuel and lighting 15 50 60 120.00 1800.00
Miscellaneous 20 60 80 133.33 2666.60
100 11333.15
Problem
σ 𝑝𝑤 11333.15
Consumer price index by Family Budget method = σ𝑤
= = 113.33
100
The Chain Base Index Numbers:
In chain base method, the relatives for each year is found from the prices of the immediately
preceding year. Thus the base changes from year to year. Such index number are useful in
comparing current year figures with the preceding year figures. The relatives which we found
by this method are called link relatives.
current years figure

Thus, link relatives for current year = previous years figure × 100
And by using these link relatives we can find the chain indices for each year by using the
below formula
link relative of current year × 𝑐ℎ𝑎𝑖𝑛 𝑖𝑛𝑑𝑒𝑥 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟

Chain index for current year = 100
The Chain Base Index Numbers(Problems)
Problem 11 From the following data of whole sale prices of wheat for ten years
construct index number taking a) 1998 as base b) by chain base method.
Year Price of wheat Year Price of wheat
(Rs. Per 40 kg)) (Rs. Per 40 kg)) This means that from 1998 to
1998 50 2003 78 1999 there is 20% increase, from
1999 60 2004 82
2000 62 2005 84 1999 to 2000 there 24% increase
2001 65 2006 88 and so on.
2002 70 2007 90
Solation: a) Index number taking 1998 as base
Year Price of wheat Index number Year Price of wheat Index number
(1998=100) (1998=100)
1998 50 100 2003 78 78
× 100 = 156
50
1999 60 60 2004 82 82
× 100 = 120 × 100 = 164
50 50
2000 62 62 2005 84 84
× 100 = 124 × 100 = 168
50 50
2001 65 65 2006 88 88
× 100 = 130 × 100 = 176
50 50
2002 70 70 2007 90 90
× 100 = 140 × 100 = 180
50 50
b) Constriction of chain indices
Year Price of wheat Link Relatives Chain indices
(1998 = 100)
1998 50 100 100
1999 60 60 120
× 100 = 120.00 × 100 = 120
50 100
2000 62 62 103.33
× 100 = 103.33 × 120 = 124
60 100
2001 65 65 104.84
× 100 = 104.84 × 124 = 130
62 100
2002 70 70 107.69
× 100 = 107.69 × 130 = 140
65 100
2003 78 78 111.43
× 100 = 111.43 × 140 = 156
70 100
2004 82 82 105.13
× 100 = 105.13 × 156 = 164
78 100
2005 84 84 102.44
× 100 = 102.44 × 164 = 168
82 100
2006 88 88 104.76
× 100 = 104.76 × 168 = 176
84 100
2007 90 90 102.27
× 100 = 102.27 × 176 = 180
88 100
Note: The chain indices obtain in (b) are the same as the fixed base indices in (a). In fact, chain
index figures will always be equal to fixed index figure if there is only one series.
Problem 12: Compute the chain index number with 2003 prices as base from the
following table giving the average whole sale prices of commodities A, B, C for the year
2003 to 2007.
Commodity Average whole sale price (in Rs.)
2003 2004 2005 2006 2007
A 20 16 28 35 21
B 25 30 24 36 45
C 20 25 30 24 30
Solution: Computation of chain indices
Commodity Relatives based on preceding year
2003 2004 2005 2006 2007
A 100 16 28 35 21
× 100 = 80 × 100 = 175 × 100 = 125 × 100 = 60
20 16 28 35
B 100 30 24 36 45
× 100 = 120 × 100 = 80 × 100 = 150 × 100 = 125
25 30 24 36
C 100 25 30 24 30
× 100 = 125 × 100 = 120 × 100 = 80 × 100 = 125
20 25 30 24
Total of link relatives 300 325 375 355 310
Average of relatives 100 108.33 125 118.33 103.33
Chain index 100 108.33 125 118.33 103.33

× 100 = 108.33 × 108.33 × 135.41 × 160.23
(2003 = 100) 100 100 100 100
= 135.41 = 160.23 = 165.57
Conversion of Fixed Based Index to Chain Base Index:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟𝑠 𝐹𝐵𝐼
Current year CBI = 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟𝑠 𝐶𝐵𝐼 × 100
Conversion of Chain Based Index to Fixed Base Index:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟𝑠 𝐶𝐵𝐼 × 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟𝑠 𝐹𝐵𝐼

Current year FBI = 100
Problems
Problem 13 Compute the chain base index numbers.
Year 1980 1981 1982 1983 1984
Fixed base index 100 120 150 130 160
Solution:
Year Fixed base index 𝐼
Chain base index 𝐼1 × 100
0
1980 100 100

1981 120 120
× 100 = 120
100
1982 150 150
× 100 = 125
120
1983 130 130
× 100 = 86.67
120
1984 160 160
× 100 = 123.08
130
Problems
Problem 14 calculate fixed base index numbers from the following chain base index
numbers.
Year 1978 1979 1980 1981 1982
Chain base index 120 140 120 130 150
number
Solution: Computation of fixed base index numbers

Year Chain base index number Fixed base index numbers
1978 120 120

1979 140 140
× 120 = 68
100
1980 120 120
× 168 = 201.60
100
1981 130 130
× 201.60 = 262.08
100
1982 150 150
× 262.08 = 398.12
100
Note: It may be remembered that the fixed base index for the first year is same as the chain
base index for that year.
Mixed Type of Problems
Problem 15 If Laspeyre’s index number is 212.6 and Passche’s index number is 208.4,
find Bowley and Fisher’s index numbers.
Solution:
1
a) 𝑃01 𝐵𝑜𝑤𝑙𝑒𝑦 = 2 𝐿 + 𝑃
1
= 212.6 + 208.4 = 210.5
2
a) 𝑃01 𝐹𝑖𝑠ℎ𝑒𝑟′𝑠 = 𝐿 × 𝑃
= 212.6 × 208.4 = 210.49
Thus, Bowley index numbers is 210.5 and Fisher’s index numbers is 210.49
Problem 16 If Fisher’s index number is 114.5 and Passche’s index number is 116.1, find
Laspeyre’s index number.
Solution:
a) 𝑃01 𝐹𝑖𝑠ℎ𝑒𝑟′𝑠 = 𝐿 × 𝑃
114.5 = 𝐿 × 116.1
Squaring on both the sides we get
114.5 2 = 𝐿 × 116.1
114.5 2
𝐿= 116.1
= 113.51
Thus, Laspeyre’s index number is 113.51
Problem 17 If Laspeyre’s index number is 461.3 and Bowley index numbers is 447.4,
find the Passche’s index number.
Solution: We have
1
𝑃01 𝐵𝑜𝑤𝑙𝑒𝑦 = 𝐿+𝑃
2
1
447.4 = 2 461.3 + 𝑃
2 × 447.4 = 461.3 + 𝑃
894.8 = 461.3 + 𝑃
𝑃 = 894.8 − 461.3 = 433.5
Thus, Passche’s index number is 433.5
Thank you

MODULE 3 18BS5AI01 Statistics Using R

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MODULE 3 18BS5AI01 Statistics Using R

Uploaded by

Copyright:

Available Formats

Statistics using R

This is called an Index number.

 Index Number is a number which indicate the changes in magnitudes.

 M.Spiegel says, “ An index number is a statistical measure designed to show

changes in variable or a group of related variables with respect to time,

geographic location or other characteristic”.

which are not capable of direct measurement.

1. Index numbers are specified averages.

2. Index numbers are expressed in percentage.

3. Index numbers measure changes not capable of direct

4. Index numbers are for comparison.

There are various types of index numbers, but in brief, we

shall take three kinds and they are

2. Quantity Index and

Quantity index number is the changes in the volume of goods produced or

The various notations used are as given below:

𝑃1 = Price of current year 𝑃0 = Price of base year

𝑞1 = Quantity of current year 𝑞0 = Quantity of base year

Where , σ 𝑃1 = total prices for the current year

σ 𝑃0 = Total prices for the base year

It is known as ideal index number because

Here the average of the quantities of two years is used as weights.

Solution: Commodity 𝒑𝟎 𝒒𝟎 𝒑𝟏 𝒒𝟏 𝒑𝟎𝒒𝟎 𝒑𝟎𝒒𝟏 𝒑𝟏𝒒𝟎 𝒑𝟏𝒒𝟏

= 1.459 × 1.487 × 100 = 2.170 × 100

B 20 15 15 20 300 225 400 300

380 324 500 422

Where 𝑤 = the weight of the commodity

This is nothing but Paasche’ s Formula.

Fisher’ s quantity index number = 𝑄01 𝐹 = 𝐿 × 𝑃

A 10 10 12 15 100 150 120 180

Fisher’ s quantity index number = 𝑄01 𝐹 = 𝐿 × 𝑃 = 143.4 × 143.7 = 143.6

= 1.436 × 100 = 143.6

Therefore, Fisher ideal index satisfies the time reversal test.

A 12 10 15 12 120 150 144 180

B 15 7 20 5 105 140 75 100

250 330 264 352

= 1.056 × 1.067 × 100

264 353 330 250

Hence Fisher ideal index satisfy the time reversal test.

264 352 330 352

1. Aggregate Expenditure method (or) Aggregate method.

2. Family Budget method (or) Method of Weighted Relative method.

1. Aggregate Expenditure method:

This method is estimated an aggregate expenditure of an average family

“Weighted average price relative method” which we have studied before

Food 35 150 140 93.33 3266.55

current years figure

link relative of current year × 𝑐ℎ𝑎𝑖𝑛 𝑖𝑛𝑑𝑒𝑥 𝑜𝑓 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟

Chain index 100 108.33 125 118.33 103.33

Conversion of Chain Based Index to Fixed Base Index:

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟𝑠 𝐶𝐵𝐼 × 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟𝑠 𝐹𝐵𝐼

1980 100 100

Solution: Computation of fixed base index numbers

1978 120 120

You might also like