3/5/2020

ECON 316
Applied Statistics for Economists
• Lecture 6 – Definition and Construction of Simple
& Aggregated Index Numbers I

Lecturer: Prof. Daniel K. Twerefou, Department of

Economics
Contact Information: dktwerefou@ug.edu.gh

Slide 1

Outline
• Explanation and interpretation of index numbers
• Classification of index numbers
• Simple price, quantity and value Indices
• Aggregated (Weighted) Indices
- Laspeyres Indices

Slide 2

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What is an Index Number (IN)?

• An IN is the percentage ratio of prices, quantities and

values comparing two time periods – base period and
current period.
• Base period: period against which comparisons are made.
- indicated by the subscript o.
- Value of the IN at the base period is always 100, =
100

• Given or Current period: Period being compared with

the base period .
Slide 3

What is an Index Number (IN)?

• Period could be weekly, monthly, quarterly or
biannually or any constant proud.

• Values of the IN in subsequent years will be more

than or less than the value of the base year depending
on whether the values of the actual number has
increased or decreased.

Slide 4

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Interpretation of Index Numbers

• IN of industrial production in 2005 is 95% and
112% in 2006 compared to that of 2004 which
is the base year (100%).

Interpretation:
There is a net decrease in industrial production by
5% (95%-100%) compared to that of 2004.
There is a net increase in industrial production by
12% (112%-100%) compared to that of 2004.
Slide 5

Classification of Index Numbers

• Simple price, quantity and value Indices
• Aggregated (Weighted) Indices
- Simple aggregated price, quantity and value Indices
- Laspeyres price and quantity index
- Paasche price and quantity index
- Fisher ideal index
• Special Purpose Indices – Combine other indices to show
changes in business activity or any important occurrence
from one period to another.
• Example: Composite Index of Economic Activity (CIEA)
by BoG .
Slide 6

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Simple price, quantity and value indices

• Simple Price Index – Measures the percentage change in
the price of a good or commodity from a given base
period to another year, .
• Example: price index of cocoa.
• Simple Quantity Index – Measures the percentage change
in the quantity of a good or output from a base period to
the current period .
• Example: production index of gold.
• Simple Value Index –Measures the percentage change in
the value of a good from one period to another.
Slide 7

Construction of simple price, quantity and

value indices
• Let us denote the base year price of cocoa by and
the price of cocoa in the current year by . Then, the
simple price index for cocoa is given as:

Slide 8

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Construction of simple price,

quantity and value indices
• Analogically, we can define the simple quantity and
value indices as:
• and
respectively,
is the quantity of the commodity in the base year
is the quantity of the commodity in the current
years
is the value in the base year
is the value in the current years

Slide 9

Example 1

a. In 1990, the price of a car was ¢10,000 and in 1995, the

same car cost ¢13.000. If the base year is 1990, find the
price index of the car in 1995.
b. Interpret your results.

Slide 10

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Solution to Example 1
(A) The price of the car in the base year – 1990 is =
¢10,000
The price of the car in the current year – 1995 is =
¢13,000
•

• (B) This means that the price of the car has increased
by 30% (130-100) compared to the base year price.

Slide 11

Example 2
The table below shows the price and output of cocoa from
1996 to 2006. Using 1996 as the base year, construct for the
years:

a. Simple price index of cocoa

b. Simple quantity index of cocoa f
c. Value index of cocoa
d. Interpret the price, quantity and value indices for 2006.

Slide 12

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Slide 13

Solution to Example 2
• Recall :

• Pn are the prices of cocoa in the years other than the

year 1996 which is the base year and denoted by the
symbol P0.
• Table summaries the calculations of the simple price
indices of cocoa.

Slide 14

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Solution to Example 2 Cont’d

Price index
 p n

Price   100  Price
Year (GHC/ton)  p o  indices
5 0 0
 100  100
1996 500 5 0 0 100
5 2 0
100  104
1997 520 5 0 0 104
5 2 2
100  104
1998 522 5 0 0 104
5 2 4
 100  105
1999 524 5 0 0 105
5 5 0
100  110
2000 550 5 0 0 110
5 6 0
100  112
2001 560 5 0 0 112
5 7 0
 100  114
2002 570 5 0 0 114
5 7 7
 100  115
2004 577 5 0 0 115
5 8 0
100  116
2005 580 5 0 0 116
5 8 0
 100  116
2006 580 5 0 0 116

Slide 15

Solution to Example 2 Cont’d

• Recall::

• Formula for calculating quantity indices The table

below summarises results of the calculations of the
simple quantity indices of cocoa.

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Solution to Example 2 Cont’d

 qn 
quantity index  *100  quantity
Year Output  q0  index
120
 100  100
1996 120 120 100
125
 100  104
1997 125 120 104
135
 100  113
1998 135 120 113
130
 100  108
1999 130 120 108
140
 100  117
2000 140 120 117
137
 100  114
2001 137 120 114
145
 100  121
2002 145 120 121
150
 100  125
2004 150 120 125
150
 100  125
2005 150 120 125
160
 100  133
2006 160 120 133
Slide 17

Solution to Example 2 Cont’d

c. Recall:

• Formular for calculating value indices

• The table summarizes the results of the calculations of
the value indices

Slide 18

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Solution to Example 2 Cont’d

 vn 
Price value index   100  value
Year (GHC/ton) Output vn vo  v0  index
60 000
 100  1 00
1996 500 120 60000 60000 60 000 100
65 000
 100  1 08
1997 520 125 65000 60000 60 000 108
70 470
 100  1 17
1998 522 135 70470 60000 60 000 117
68 120
 100  1 14
1999 524 130 68120 60000 60 000 114
77 000
 100  1 28
2000 550 140 77000 60000 60 000 128
76 720
 100  1 28
2001 560 137 76720 60000 60 000 128
82650
 100  138
2002 570 145 82650 60000 60000 138
8 655 0
 100  1 44
2004 577 150 86550 60000 60 000 144
8 700 0
 100  1 45
2005 580 150 87000 60000 60 000 145
928 00
Slide
10019 1 55
2006 580 160 92800 60000 60 000 155

Solution to Example 2 Cont’d

d.Compared to the base year, the price of cocoa has
gone up by 16 percent
• Compared to the base year the quantity of cocoa
has gone up by 33 percent
• Compared to the base year, the value of cocoa has
gone up by 55 percent

Slide 20

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Activity 1
2. The table below shows gold production (in ounces) and prices (in
US$) from 1980-1984.
1980 1981 1982 1983 1984

Price Quantity Price Quantity Price Quantity Price Quantity Price Quantity
12 1350 14 1400 14 1450 15 1520 18 1160

a. Calculate the simple price index using 1980 as the base year
b. Calculate the simple quantity index using 1980 as the base year
c. Calculate the value index using 1980 as the base year

Slide 21

What is an Aggregated Index?

• Measures the percentage ratio of the sum of the

prices, quantities and values of a group of
commodities from one period to the other.
• Objective of constructing an aggregated index:
provide a basis for comparing the general price,
quantity and value of a group of commodities.

Slide 22

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Types of aggregated index

• Simple aggregated (weighted) price,
quantity and value indices.
• Laspeyres price and quantity index
• Paasche price and quantity index
• Fisher ideal index

Slide 23

What is simple aggregated price index?

• Measures the percentage ratio of the sum of the prices of a
group of commodities from one period to the other.
Mathematically:

- sum of the all commodity prices in the sample

in the given period

- sum of the same set of commodity prices in

the base year.
Slide 24

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What is simple aggregated quantity

index?
• Measures the percentage ratio of the sum of the quantities
of a group of commodities comparing two time periods.
Mathematically,

-sum of all commodity quantities in the

sample in the current period and

- sum of the same set of commodity

quantities in the base year.
Slide 25

What is simple aggregated value index ?

• Measures the percentage ratio of the sum of the

values of a group of commodities comparing two
time period - base and current year.
Mathematically,

- sum of all commodity values in the

sample in the current period
- sum of the same set of commodity
values in t he base year.
Slide 26

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Example 1
The table below shows the production (in tons) and unit
prices (in ¢) of some selected commodities in Ghana for
2005-2009.

i. Using 2005 as the base year, calculate

a. The simple aggregated price and quantity indices
b. The value index
ii. Interpret your results for the year 2008.

Slide 27

Example 1

Slide 28

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Solution to Example 1

a. Recall:

We have to sum the prices of all the commodities

for every year and divide each of the sums by the
sum of the base year prices to obtain the aggregate
price indices.

Slide 29

Solution to Example 1Cont’d

p
i 1
ni
v Ip  v
x100
p
i 1
ni
0
p 0i
i 1
(Aggregated
Year (sum of prices ) Price indices)

2005 79 100

2006 96 121.52

2007 119.34 151.06

2008 150.96 191.09

2009 207.78 263.01

Slide 30

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Solution to Example 1 Cont’d

Recall:

• We have to sum the quantities of all the commodities

for every year and divide each of the sums by the sum
of the base year quantities to obtain the aggregate
quantity indices. The table summarizes the results

Slide 31

Solution to Example 1 Cont’d

(Aggregated
quantity index)
v
Sum of
quantity q ni
Iq  i v1 x100
v 
qni 
0

Year  i1 
q
i 1
0i

2005 7350 100

2006 9177 124.86
2007 11645 158.44
2008 15022 204.38
2009 19689 267.88
Slide 32

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Solution to Example 1 Cont’d

• B. The simple aggregated value index is computed as;

• We have to sum all the values of all the commodities

for every year and divide each by the sum of the base
year prices to obtain the aggregate value indices.

Slide 33

Solution to Example 1 Cont’d

v ni

Sum of Iv  iv1 x100

0
value v
i 1
0i

v 
vni  Aggregated
Year  i1  value index
2005 61550 100
2006 91784.4 149.12
2007 142469.5 231.47
2008 225511.8 366.39
2009 394496.3 Slide 34
640.94

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Solution to Example 1 Cont’d

• Compared to 2005, the aggregate prices of the

commodities have gone up by 191.09 %

• Compared to 2005, the aggregated quantities of the

commodities have gone up by approximately 204.38%

• Compared to 2005, the value of the commodities has

gone up by 366.39 %

Slide 35

What is the Laspeyres Price Index?

• An aggregated index that measures the percentage ratio of
the prices of a group of commodities comparing two time
periods - base year and the current year. However, the
prices of the commodities are weighted by the base year
quantities. Mathematically:

- -prices of the commodities at the current years

- quantities of the commodities at the base year
- prices of the commodities at the base year
Slide 36

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Example 1
The prices of three food items for 1995 and 2002 and the
quantities consumed by a certain community in 1995 are
shown in the table below.
Item 1995 Price 1995 Amount 2002 Price (¢)
(¢) consumed

Milk (per litre) 0.64 100 0.61

Bread (per loaf) 0.65 1000 0.59

Avocado (each) 0.50 1 1.00

i. Construct the Laspeyres price index using 1995 as the

base year.
ii. Interpret your results Slide 37

Solution to Example 1
• i. Recall:

• The table summarizes the computation of the numerator

and denominator of the formula above

po qo pn po qo pnqo
Milk 0.64 100 0.61 64 61
Bread 0.65 1000 0.59 650 590
Avocado 0.50 1 1 0.50 1
Slide 38

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Solution to Example 1 Cont’d

• From the table

• Thus :

• ii Average price of the food items declined by 8.7%

Slide 39

What is the Laspreyes Quantity

Index?
• An aggregated index that measures the
percentage ratio of the quantities of a group of
commodities comparing two time periods -
base year and the current year. However, the
quantities of the commodities are weighted by
the base year prices.

Slide 40

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What is the Laspreyes Quantity

Index?
• Mathematically :

• - quantities of the commodities at the current year

• - quantities of the commodities at the base year
• - prices of the commodities at the base year
• Unlike the Laspreyes price index, here the base year
prices are used as the weights for the quantities.
Slide 41

What is the Laspeyres value Index?

• An aggregated index that measures the percentage
ratio of the values of a group of commodities
comparing two time periods - base year and the
current year.

Slide 42

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Example 2
The table below shows the prices (in cedis per kilograms)
and quantities (in kg) of fruits bought from 2000 -2008 in
the Northern Region of Ghana.

Using 2005 as the base year, calculate the

a. Laspeyres quantity index and the Value index
b. Interpret your results for the year 2008.

Slide 43

Example 2
Items 2005 2006 2007 2008 2009
Price Quantity Price Quantity Price Quantity Price Quantity Price Quantity
Orange 2 1120 2 1165 2 1188 2 1224 3 1371
Pineapple 1 1130 1 1175 1 1222 2 1271 2 1436
grape 2 1110 2 1143 2 1178 2 1213 3 1249
Mango 5 1400 7 1428 7 1457 10 1486 15 1515
Pawpaw 6 1270 8 1308 9 1347 10 1388 14 1429
Pear 8 1230 10 1292 11 1356 14 1410 18 1453
Mandarin 3 2000 3 2100 3 2205 4 2293 6 2362
Apple 8 1500 12 1575 13 1654 16 1720 21 1771
watermelon 4 1600 4 1680 5 1764 6 1835 8 2036

Slide 44

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Solution to Example 2
• a. Recall :

• We have to first multiply the quantities of each food

item by the respective base year price and sum it for
every year as shown in he table.

Slide 45

Solution to Example 2
2005 2006 2007 2008 2009
Orange 2240 2330 2914 2448 2742
Pineapple 1130 1175 1347 1271 1436
grape 2220 2286 2712 2426 2498
Mango 7000 7140 11025 7430 7575
Pawpaw 7620 7848 9924 8328 8574
Pear 9840 10336 14112 11280 11624
Manderine 6000 6300 6615 6879 7086
Apple 12000 12600 13232 13760 14168
Watermelon 6400 6720 7056 7340 8144

Total
 v 
  q ni p 0 i 
 i 1  54450 56735 68937 61162 63847

Slide 46

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Solution to Example 2 Cont’d

Using our formula, we obtain the index for 2005 and
2006 below and the rest follows analogically as
summarized in the table.

Year 2005 2006 2007 2008 2009

Iq ( L) 100 104.2 126.6 112.33 117.26

Slide 47

Solution to Example 2 Cont’d

• The Laspeyres value index is given as

• We have to first multiply the quantities of each food

item by the respective price and sum it for every
year as shown in he table.
Slide 48

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Solution to Example 2 Cont’d

Slide 49

Iv ( L)

Solution to Example 3 Cont’d

Using the value index formula, we obtain

• The rest follows analogically as presented in the previous table.

Slide 50

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Solution to Example 3 Cont’d

Years 2005 2006 2007 2008 2009
Iv(L) 100 130.56 147.16 190.26 270.46

• b. Results for 2008 indicate that on the average, the

commodities have gone up by 12.33% compared to the base
year. On the other hand, the values of the commodities have
gone up by 90.26% in 2008 compared to the 2005 value.

Slide 51

Activity 2
The table below shows the prices (in cedis) and quantities
(in 1000 tons) of various tubers produce from 1980 to 1984.

Using 1982 as the base year, calculate the

i. Laspeyres price index, quantity index and value index
ii. Interpret your results in (i) for the year 1984.

Slide 52

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Activity 2

Slide 53

Activity 1
The table below shows the average prices (in cedis) and
output (in tons) of vegetables for a certain country from
2000 to 2004.

Using 2005 as the base year, calculate:

i. The simple aggregated price index, quantity index and
the value index
ii. Interpret your results for the year 2008.

Slide 54

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Activity 1

2000 2001 2002 2003 2004

Price Quantity Price Quantity Price Quantity Price Quantity Price Quantity

Kontomire 4 200 4.40 240 4.84 288 5.32 346 6.12 415

Garden Eggs 7 1500 8.40 2100 10.08 2940 12.10 4116 14.52 5762

Tomatoes 10 1700 10.50 2210 11.03 2873 11.58 3735 14.47 4855

Okro 20 1000 28.00 1200 39.20 1440 54.88 1728 82.32 2074

Pepper 6 700 6.30 721 6.62 743 7.61 765 10.27 788

Cucumber 12 1550 15.60 2325 20.28 3488 26.36 5231 34.27 7847

Carrots 14 2000 14.70 2220 16.91 2464 17.75 2735 26.63 3036

Cauliflower 25 1500 37.50 2100 56.25 2940 84.38 4116 126.56 5762
Onion 17 1600 18.87 1936 20.95 2343 23.25 2834 25.81 3430
Slide 55

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