Index numbers

Introduction

• Time series in the form of price and quantity index numbers.

• Magnitude of certain variable over time or space.

• Eg: BSE Index, Whole sale price index, Consumer price index.
Types of index number

• Price index number – Change in price of the commodities over time.

• Quantity index number – Change in production of commodity over

time.
Uses:
• Guide to business policies
• Indices of industrial production
• Forecasting
• To find in increase in physical volume as opposed to rupee value
• Used to adjust wages and salaries
• To provide incentive to efficient workers with the production indices.
Problems in index number construction

• Selection base year

• Type of formula

• Selection of weights

• The data for index numbers

Types of Price Index number
• Simple Index Numbers
• Composite Index Numbers
• Simple Average of Price Relatives
• Weighted Relative Price Index Numbers
• Laspeyres and Paasche Formula
• Fisher’s Method
• Bowley’s Method
• Marshall – Edgeworth’s Method
Simple Index Number
Year 1995 1996 1997 1998 1999 2000
Price (in Rs. 3000 3200 3250 3100 3290 3600
Per Tonne)

Simple Index Number = (P1/P0)*100

Now, Find Simple Index Number for Years 1996, 1997, 1998, 1999, 2000
considering 1995 as the base year.
Composite Index Number
• When there are several commodities, to compare the prices of the
commodities.
• A composite index number is an index for a time series consisting of total
price of two or more commodities
• From the following data, find Composite price index.

Commodity Quantity Price (year 1) (Rs) Price (Year 2) (Rs)

Bread Loaf 10 14
Milk Litre 15 20
Eggs Dozen 10 16
35 50

σ 𝑃0 50
Composite price index =σ = ∗ 100 = 142.86
𝑃1 35
Simple Average of Price Relatives
• Step 1: Calculate price relatives of the commodities covered in the index
• Step 2: Take the average of price relatives
• Calculate price index for year 2.
Commodity Quantity Price (year Price (Year PR = (P1/P0)
1) (Rs) (Po) 2) (Rs) (P1)
Bread Loaf 10 14 1.4
Milk Litre 15 20 1.3
Eggs Dozen 10 16 1.6
35 50 4.3

σ𝑃1ൗ𝑃𝑜 4.3
Simple Average of Price Relatives = = ∗ 100 = 143.33
𝑁 3