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Before We Start…
It is assumed that after going through the earlier session
you are now able to:

 Application of Simple Linear Correlation and regression

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Session 10

Quantitative Methods I

 Topics to be covered in this session:

 Index Number

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Session Learning Objectives…

At the end of this session you should be able to:

 Explain the concept of Index number

 Compute the various mathematical formulae in the
context of Index number

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Index Number
 An index number is an economic data figure
reflecting price or quantity compared with a
standard or base value.
 The base usually equals 100 and the index
number is usually expressed as 100 times the
ratio to the base value.
 For example, if a commodity costs twice as much
in 1970 as it did in 1960, its index number would
be 200 relative to 1960. Index numbers are used
especially to compare business activity, the cost
of living, and employment. They enable
economists to reduce unwieldy business data into
easily understood terms.
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Contd…
Commodity Unit Price per Price per
Unit (1998) Unit (2008)
A Kg 100 150
B Kg 120 228
C Kg 100 52
D Kg 87 156
E Kg 65 98

On the basis of this data, how does the overall food price
in 1998 compare with that in 2008 ---- how many times or
what percent?
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Contd…
Commodity Price per Price per Ratio
Unit (1998) Unit (2008)
A 100 150 (150/100) x100= 150

B 120 228 (228/120) x100= 190

C 100 52 (52/100) x100= 52

D 87 156 (156/87) x100= 179

E 65 98 (98/65) x100= 150

∑ 424 732 721

Unweighted Aggregate Price Index = 732/424 x 100 = 172

Unweighted Average of Relatives Index = 721/5 = 144

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Importance of Weighted Average

Elements in 2018( Rs) 2022 Qty sold Q1Po Q1 P1
the Composite in base yr
Milk ( 1 litre) 20 30 20000 400000 600000
Eggs ( 1 dozen) 55 72 3500 192500 252000
Bread ( 1 large) 22 30 11000 242000 330000
Gasoline ( 1 72 104 154000 11088000 16016000
ltr)
∑ 169 236

Laptop 25000 18000 500 12500000 9000000

25169 15236 24422500 26198000

Unweighted Aggregate Price Index = 236/169 x 100 = 139

Unweighted Price Index ( incl. Laptop)= 15236/25169x100 = 60
Weighted Price Index = 261980/244225 x 100 = 107
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Type

 Index numbers are numerical figures which

indicate the relative position in respect of price,
or quantity at certain periods of time as
compared with another period, called base
period.
 When the comparison is in respect of price, they
are called “ price index number”
 Similarly we have “ quantity index number”.

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Type

 Index number for the base period is always taken

as 100.
 Index number for any other period, called current
period shows the overall level of price or quantity
of articles as a percentage of that in the base
period.

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Methods of Construction of Index Number

Aggregative Method
 Simple Aggregative Formula
 Weighted Aggregative Formula
Relative Method
 Simple Average of Relatives
 Weighted Average of Relatives
Weighted Aggregative Formula
 Laspeyres’ Formula
 Paasche’s Formula

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Aggregative Method
In this method, the aggregate price of all items in the
given year is expressed as a percentage of the same
in the base year, giving the index number.

Index Number = (Aggregate Price in the given

year)/ (Aggregate Price in the base year) X 100

Simple Aggregative Index (I0n ) =( Σ pn / Σ p0 ) X 100

Weighted Aggregative Index (I0n ) =( Σ pnw / Σ p0w

) X 100

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Relative Method
In this method the price of each item in the current
year is expressed as a percentage of the price in the
base year. This is called Price Relative and is given
by the formula.

Price Relative = (Price in the given year)/ (Price in

the base year) X 100
= (pn / p0) X 100
Owners of resources compare relative prices in different
markets to determine where to sell resources or services
to earn the most benefits and businesses compare the
price ratio of different resources to determine which
combinations to use in production.

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Contd…

Simple A. M. of Relatives Index

(I0n ) = Σ (Price Relatives) ÷ k
Where k is the number of items included.

Weighted A. M. of Relatives Index

(I0n ) = [Σ (Price Relatives) X w]/ Σ w

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Index Numbers

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Index Nos (Con’td)

Laspeyres’ Index ( Σ pnq0 / Σ p0 q0) X 100

Pasche’s Index ( Σ pnqn / Σ p0 qn) X 100

Fixed Weight ( Σ p1q2 / Σ p0 q2) X 100

Aggregates Index

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Fixed Weight Aggregates Method

This method instead of using current period or base

period quantities, it uses weights from a representative
period. These weights are referred to as fixed weights.
The fixed weights and the base prices do not have to
come from the same period. Primary advantage is
flexibility in selecting the base price and fixed weight

( Σ p1q2 / Σ p0 q2) X 100

where fixed weight is q2

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CPI

A consumer price index (CPI) is usually calculated as a weighted

average of the price change of the goods and services covered by
the index. The weights are meant to reflect the relative importance of the
goods and services as measured by their shares in the total consumption
of households.

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WPI

WPI or Wholesale Price Index tracks prices at the

commodity level while CPI tracks at the consumer
level. Issued by RBI

WPI = (Current Price / Base Period Price) × 100

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CONCEPT OF SEASONAL INDEX

Year Quarter
I II III IV Total
1 122 108 81 90 401
2 130 100 73 96 399
3 132 98 71 99 400
Average 128 102 75 95 400

Seasonal Index = period average demand / average demand for all

periods
Average Quartly Demand = 100

Seasonal Index = 128/100 = 1.28 ( Quarter – I)

= 102/100 = 1.02 ( Quarter – II)
= 75/100 = 0.75( Quarter –III)
= 95/100 = 0.95 ( Quarter – IV)

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Application of index in stock markets

While BSE and NSE are stock markets, both Sensex and Nifty are
stock market indices. A stock market index summarises the
movements of the market in real-time. A stock market index is
created by grouping together similar kinds of stock. Sensex,
which stands for ‘Stock Exchange Sensitive Index’, is the stock
market index for the Bombay Stock Exchange. Nifty stands for
‘National Stock Exchange Fifty’ and is the index for the National
Stock Exchange.
It indicates the whole market and is a comparative measurement
displaying the amount earned by the average fund on the
market versus the amount it should have earned. eg: BSE Sensex,
NSE Nifty (Nifty 50).
Stock market indices like Sensex and Nifty depict the condition
of the market briefly. They help investors discover patterns in
the market.
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Application of indices in contracts

PRICE ADJUSTMENT

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Crib Sheet

Index number : Laspeyres’ Index :

An index number is an
economic data figure reflecting
price or quantity compared with ( Σ pnq0 / Σ p0 q0) X 100
a standard or base value.

Paasche’s Index:

( Σ pnqn / Σ p0 qn) X 100

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THANK YOU…

All information, including graphical representations, etc provided in this presentation is for exclusive use of current GBS
students and faculty. No part of the document may be reproduced in any form or by any means, electronic or otherwise, without
written permission of the owner.

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