INDEX

NUMBERS
 Content :

introduction Tests of adequacy

1 5

Formula at glance
9
Construction of index
2 6 Weighted average of
numbers
price relative method

Unweighted index Consumer price 10 Practice sum

3 numbers 7 solutions
index

Weighted index Limitations of index

4
numbers 8 numbers
 INTRODUCTION TO INDEX NUMBERS
he
c ompare t
ed t o ems
Index number, a technique developed o w , i f we ne f different it
o in
You kn price level what it was
by Bishop Fleetwood, is a statistical g e
avera in 2019 wit EX
h
s D
of sale can use IN .
device for measuring changes in the 2018 w e
NUMB
ERS
magnitude of a group of related
variables. They are indicators which
reflects the relative changes in the
level of certain phenomenal in any
given period, called the current year
with respect to its value in some fixed
period, called the base year.
 CHARACTERISTICS

◇Index numbers are specialized averages.

◇Index number are generally expressed in percentages.

◇ Index number measure the effect of changes in relation to time or

place. Example: cost of living may be different at two different places at
the same time or cost of living in one city can be compared .

◇Index numbers measure the change not capable of direct measurement.

Example : cost of living cannot be measured in qualitative terms directly .
We can only study relative changes by variations in certain other factors
connected to it.

     
USES OF INDEX NUMBERS
1.Index number helps in policy formulation.

2.Index numbers act as economic barometer.

3.Index number help in studying trends.

4. Index number helps to measure and compare

changes.

5.Index number help in measuring purchasing

power.

6. Index numbers help in deflating various

values.
Industrial  production, Retail sales or
imports and exports profits or inventories,
are some examples can be made by
of QUANTITY INDEX value index
NUMBERS.
TYPES OF INDEX numbers.

NUMBERS
PRICE INDEX QUANTITY VALUE INDEX
NUMBER INDEX NUMBER NUMBER

It measures the It studies the This is used to

general changes changes in the compare
in the price volume of goods changes in total
levels between produced, sold or value from one
current and purchased over a period with total
base year. particular period. value of base
period. 
 Retail price index
Wholesale price index number reflects general changes
Popularly used in
in the retail prices of
business industry and
policy market. various items including
food, housing, clothing
and so on.

Types of price index

Wholesale price index
number reflects the It is primary
general price level for a measure of the cost
Retail price index number of living in a country.
group of items taken as a
whole.
 NOTATIONS
USED IN THIS
CHAPTER

1
P CURRENT YEAR
PRICE 0
Q V BASE YEAR
QUANTITY VALUE
 CHALLENGES FACED WHILE CONSTRUCTING INDEX NUMBERS

01 02 03 04

Selection of Defining the Selection of Price quotations

base year purpose items Choice of suitable.

05 06 07 08

average Selection Selection of selection of selection of

of suitable weight appropriate formula source of data average
 Methods Of constructing index number

Unweighted mean Weighted mean

Simple aggregate Simple Average of Weighted Weighted average

Method price relative aggregate of price relative
Unweighted INDEX NUMBER :
Index numbers are said to be unweightedwhen each item has the same
weightwhen no weight is assigned to any number.
Simple aggregate method
In this method, aggregate prices of all the
selected commodities in the current year
are expressed as a percentage of the
aggregate price in the base year.
Steps to calculate:
• Add up the current year prices of all
the goods i.e. Sigma P1
• Add up the base year prices of all the
goods i.e. Sigma P0.
•
Simple Average of price relative
It is the  improvement over the aggregative
price index because it is not affected by the
unit in which prices are quoted.
Steps to calculate:
• Calculate the price relatives of the current year
(P1/P0*100)
• Obtain their total i.e. sigma(P1/P0*100)
• Divide the sum by the number of commodities.
•
EXAMPLE 1: Construct index number for 2016-17 taking 2011-12 as the base year
from the following data by simple aggregate method.

Commodity Price in 2011-12(per kg) Price in 2016-17(per kg)

Wheat $20 $25

Rice $30 $40

Pulses $60 $80

Sugar $30 $40

 Construction of price index
SOLUTION :
Commodity Price in 2011-12($) (P0) Prices in 2016-
17($)(P1)
Wheat $20 $25
Rice $30 $40
Pulses $60 $80
Sugar $30 $40
Total ΣP0=$140 ΣP1=$185

Price index for the year 2016-17 with year 2011-12 as baseP01 = Σ p1/ΣP0×100 =
185/140×100=132.14.
Ans: price index number = 132.14

The price index number (132.14) reveals that there is a net increase of 32.14% in
prices in the year 2016-17 , as compared to the prices in the year 2011-12.
EXAMPLE 2 : From the following data, construct an index for 2016 taking 2011 as
base by the simple average of relatives method.

Commodities Prices in (2011) Price in (2016)

A $50 $70

B $40 $60

C $80 $100

D $100 $120

E $20 $20
 Price index number by simple average of relatives method
SOLUTION :
Commodities
Prices in (2011) Price in (2016) Price relatives (P1/P0*100)
A
$50 $70 70/50*100=140
B
$40 $60 60/40*100=150
C
$80 $100 100/80*100=125
D
$100 $120 120/100*100=120
E
$20 $20 20/20*100=100
N=5
Σ(p1/p0×100)= 635
P01= Σ(p1×p0)/N= 635/5=127 Ans: index number =127

The price index of 127 shows the increase of 27% in prices in the year 2016 as
compared to year 2011.
1 PRACTICE : The following are two sets of retail prices of a typical family's shopping
QUESTION basket. The data pertain to retail prices during 2001 and 2007

COMMODITY PRICES IN ($) (2001) PRICES IN (2007) ($)

Milk (1 litre) $18 $20

Banana (1 dozen) $15 $15

Butter (1 kg) $120 $150

Bread (400 gms) $9 $14

Calculate the simple aggregate price index and simple average of price
relative method for 2007 using 2001 as the base year.
 Weighted Index Number :
In this method, different weights are assigned to the items according to their
relative importance. Weights used are the quantity weights. Many formulae
have been developed to estimate index numbers on the basis of quantity
weights.
Weighted index number are constructed by the following two method
1. Weighted aggregative method
2. Weighted average of price relative’s method
Weighted aggregative method: This method is similar to the simple aggregative method with the
basic difference that weights (quantity consumed or quantity purchased or quantity produced or
quantity supplied) are multiplied to the prices of respective 4 commodities.

Formula : P01= Σp1q1/ΣP0q0×100

 Types of weighted aggregative method

Laspeyre’s Method Paasche’s method

Dorbish and bowley method

P01(L) = ∑p1q0 ÷ ∑p0q0×100 P01(P)= ∑p1q1 ÷ ∑p0q1×100 P01(DB)= (p01(L)+p01(P)) ÷ 2 ×100

Fisher’s ideal method Kelly’s Method

Marshall-edgeworth method

P01(F)= √p01(L)×p01(P) × 100 P01(K)= ∑p1q÷∑p0q ×100

P01(ME)= ∑p1q0 + ∑p1q1 ÷ ∑p0q0

+ ∑p0q1 × 100
 STEPS FOR Calculation OF
WEIGHTED INDEX NUMBERS

1 2 3
Multiplying the current year Similarly, multiply the base Divide ΣP0Q0 and multiply
prices(p1) by base year year prices(P0) by base the quotient by 100.This
quantity weights (q0) and total year quantity weights(Q0) will be the index number
all such products to get Σp1q0. and obtain the total to get of the current year.

ΣP0Q0.
Laspeyre’s price index number is the weighted
aggregative price index number which uses base
year’s quantity as the weights.
From the following data calculate lasperyre's
price index number.
ITEMS BASE YEAR CURRENT BASE YEAR
(PRICE) (p0) YEAR (PRICE) (QUANTITY)
(p1) (q0)

A 10 12 5
B 15 18 8
C 6 4 3
D 3 3 4
SOLUTION :
ITEMS BASE YEAR CURRENT YEAR BASE YEAR p0q0 p1q0
(PRICE) (p0) (PRICE) (p1) (QUANTITY) (q0)

A 10 12 5 50 60

B 15 18 8 120 144

C 6 4 3 18 12

D 3 3 4 12 12

Total 200 228

P01(L) = ∑p1q0 ÷ ∑p0q0×100

= 228 ÷ 200 ×100
= 114
2 PRACTICE :
From the following solve using Laspeyre’s price index number
QUESTION
ITEMS BASE YEAR PRICE (p0) CURRENT YEAR BASE YEAR (q0)
PRICE (p1)

A 11 15 5

B 20 20 78

C 3 5 45

D 10 6 12
 Advantages and Disadvantages of the Laspeyres Price Index
The advantages of the index include:
The advantages of the index include:
• Easy to calculate and commonly used
Easy to calculate and commonly used
• Cheap to construct
Cheap to construct
• Quantities for future years do not need to be calculated – only base year quantities (weightings) are used
Quantities for future years do not need to be calculated – only base year quantities (weightings) are used
• Presents a meaningful comparison, as changes in the index are attributable to the changes in price.
Presents a meaningful comparison, as changes in the index are attributable to the changes in price.

The main disadvantages of the index are :

The main disadvantages of the index are :
It is upward-biased and tends to overstate price increases (compared to other price indices). Therefore, it tends to
is upward-biased and tends to overstate price increases (compared to other price indices). Therefore, it tends to
overestimate price levels and inflation. This is due to:
verestimate price levels and inflation. This is due to:
1. New goods: More expensive new goods that cause an upward bias in prices
. New goods: More expensive new goods that cause an upward bias in prices
2. Quality changes: Price increases solely due to quality improvements should not be considered inflation.
. Quality changes: Price increases solely due to quality improvements should not be considered inflation.
3. Substitution: Substituting goods or services that have become relatively cheaper for those that have become
. Substitution: Substituting goods or services that have become relatively cheaper for those that have become
 PAASCHE`S PRICE INDEX NUMBER
Paasche’s price index number is the weighted aggregative price index number which uses
current year’s quantity as the weights.

From the following data calculate Paasche's price index number

ITEMS BASE YEAR PRICE (p0) CURRENT YEAR PRICE (p1) CURRENT YEAR
QUANTITY (q1)

A 20 40 6

B 50 60 5

C 40 50 15

D 20 20 25
SOLUTION :

ITEMS BASE YEAR CURRENT YEAR CURRENT

YEAR p0 q1 p1q1
PRICE (p0) PRICE (p1)
QUANTITY (q1)

A 20 40 6 120 240

B 50 60 5 250 300

C 40 50 15 600 750

D 20 20 25 500 500

Total 1470 1790

P0101 (P) = Σp11q11/Σp00q11×100

= 1790/1470×100
=121.76
3 practice : From the following solve using Paasche’s price index number

question
ITEMS BASE YEAR CURRENT YEAR CURRENT YEAR
PRICE (p0) PRICE (p1) QUANTITY (q1)

A 10 20 25

B 20 60 5

C 30 30 15

D 40 20 6
Advantages and Disadvantages of the Paasche Price Index

The advantages of the Paasche`s Price index include:

• Takes into consideration consumption patterns by using current
quantities (current weightings).
• Is not upward-biased in terms of price increases (compared to the
Laspeyres Price Index).

The disadvantages of the index include:

• Data on current weightings (i.e., quantities for each item) can be difficult to obtain.

• Costlier than using a Laspeyres Price Index.

• Tends to understate the changes in price because the index already reflects changes in
consumption patterns when consumers respond to price changes.
 Tests of Adequacy

Tests of Adequacy or Tests of Consistency There are

certain tests which are put to verify the consistency, or
adequacy of an index number formula from different
points of view. The most popular among these are the
following tests which an ideal index number should
satisfy :

1. Unit test
2. Time Reversal Test [TRT]
3. Factor Reversal Test [FRT]
4. Circular test.
1. Unit test
• This test requires that an index number formula should be such that it
does not affect the value of the index number, even if, the units of the
price or quantities quoted are altered.
Note: Only Simple Aggregative Method satisfies this test.

2. Test reversal method

• This test is proposed by Prof. Irving Fisher. It is a test to determine whether a
given formula for calculating index number will lwork both ways in time, forward
and backward. That is, the formula should be such that it will give the same
ratio between one point of comparison and the other, no matter which of the
two is taken as base . In order to satisfy this test index formula must prove the
following.
Equation: P01*P10=1
Note: Except Laspeyre`s and Paasche`s all index formula
passes this test.
 3. Factor reversal method

● This test proposes that a formula of index number should be such that it
permits the interchange of the price and the quantity factors without
giving inconsistent result. That is, the two results [Price index and
Quantity index] multiplied together should give the true value ratio.

● For the Factor Reversal test, a formula of index number should satisfy
the following equation:

Price Index x Quantity Index = Value IndexP01 x Q01 = ∑ p1q1 / ∑p0q0

 fi s her
l y
ote : On index
N
m u l a of es the
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be
num test
 4. Circular test
● This test is an extension of TRT for more than two periods of time. It
requires that an index number formula should be such that it works in a
circular fashion. Hence, this test is based on the shiftability of base
period.

● A formula to satisfy the test should comply with the following equation:

P10 x P12 x P20 = 1[For 3 periods 0, 1 and 2]

Note: The following three methods satisfy the test:
(i) Simple aggregative method
(ii) Weighted aggregative method
(iii) Kelley’s method.
 Steps to be followed in test of
adequacy

● Identify the base year and current year prices and quantities from the
given data.

● Multiply and obtain products essential for the substitution in formula.

Compute Fisher’s Index Number.

● Solve for TRT and FRT to examine whether the Index number satisfies
the following tests.
. Calculate Fisher’s index number and then test the consistency
of it by
(a)Time Reversal Test (b) Factor Reversal Test
Items Base year Base year Current Current
price (RS.) quantity year price year
(RS.) quantity
A 15 25 25 20

B 20 60 60 35

C 15 60 50 48

D 10 10 20 13

E 30 16 40 16

Computation of Fisher’s Index Number

 Solution-
Items p0 q0 p1 q1 p1q0 p0q0 P1q1 p0q1

A 15 25 25 20 625 375 500 300

B 20 60 60 35 3600 1200 2100 700
C 15 60 50 48 3000 900 2400 720
D 10 10 20 13 200 100 260 130
E 30 16 40 16 640 480 640 480
Total ∑ p1q0= ∑ p0q0= ∑ p1q1= ∑ p0q1=
8065 3055 5900 2330
Fisher Index:
● In order to compute Fisher’s Index number, one should substitute the

obtained combination of values into the below formula. 

● P01 = √ [∑p1q0 / ∑p0q0 x ∑p1q1 / ∑p0q1] x 100  

= √ [8065/3055 x 5900/2330] x 100    
  = √ 6.685 x 100      
= 2.5855 x 100
P01 = 258.55 

After computing the Fisher’s Index Number, we should examine whether the obtained
index number satisfies Time Reversal Test and Factor Reversal Test. 
A) TRT is said to be satisfied when P01 x P10 = 1

P01 x P10 = √ [ ∑p1q0 / ∑p0q0 x ∑p1q1 / ∑p0q1 ] x √ [ ∑p0q1 / ∑p1q1 x ∑p0q0 / ∑p1q0 ]
              = √ 1778/1596 x 1912/1728 x 1728/1912 x 1596/1778
              = √1 = 1
Thus, TRT is satisfied

B) FRT is said to be satisfied when, P01 x Q01 = ∑p1q1 / ∑p0q0

P01 x Q01 = √ [∑p1q0 / ∑p0q0 x ∑p1q1 / ∑p0q1] x [ ∑p0q1 / ∑p0q0 x ∑p1q1 / ∑p1q0]
               = √ [1778/1596 x 1912/ 1728 x 1728/1596 x 1912/1778]
              = √ [1912/1596]2
               = 1912/1596 =∑p1q1/∑p0q0
Hence, FRT is satisfied.
4 Practice question :

Compute Fisher’s Ideal Index and show as to how it satisfies the reversibility test
Commodities Base year Base year Current year Current year
price (Rs.) quantity price (Rs.) quantity

A 300 150 480 4

B 50 10 90 6

C 48 12 50 5

D 120 60 100 2

E 60 20 105 3
 WEIGHTED AVERAGE OF
PRICE RELATIVE METHOD  

 In this method, we make use of price relatives. When the

base and current prices of a number of items along
with weights or quantities are given, their weighted
average of price relatives is given by:

     Formula:   P01 = ΣRW/ΣW

 STEPS TO CALCULATE WEIGHTED AVERAGE PRICE
RELATIVE METHOD

Steps :
 Calculate price relative for the current year (p 1/p0×100) and denote it by R.

 Multiply the price in the base year (p0) with weights (q0) to get the value weights and denote
it by w.
 Multiply the price relative (R) with value weights (w) of each commodity and obtain its
total to get £RW.
   
 Obtain the sum total of value weights to get ΣW.
 Apply the formula P01 = ΣRW/ΣW
Example -1
Calculate price index for the following data by applying weighted average

Commodities Price in 1991 Price in 1992 Weights

(Rs.) (Rs.)

Wheat (kg.) 2 2.5 40

Sugar (kg.) 3 3.25 20

Milk (litre) 1.5 1.75 10

 Solution :
Commodities p0 p1 Quantity W (p0 x q0) R(p1/p0*100) RW
(Q0)

Wheat (kg.) 2 2.5 40 80 125 10000

Sugar (kg.) 3 3.25 20 60 108.3 6498

Milk (litre) 1.5 1.75 10 15 116.6 1747.5

Total Σp0 xq0=155 ΣRW=18245.5

P01 = ΣRW/ ΣW
= 18245.5/ 155
= 118.8
 5. PRACTICE QUESTION :
calculation of index number by weighted relatives method from the following data for the
year 2016 with 2011 as the base year.

COMMODITIES PRICES (2011)($) PRICES (2016)($) QUANTITIES (2011)

A 5 8 80

B 8 14 65

C 12 18 42

D 4 5 37

E 4 5 31

F 2 4 15
 Consumer Price Index
● Consumer Price Index (CPI)  numbers It is also referred to as ‘cost of
living index numbers’.

● In simple terms, it means the average change in prices, over a time,

paid by the ultimate consumer for a specified set of goods and
services.

● Uses or objectives of the CPI numbers-

1. They are used to determine the purchasing power of money and for
computing the real wage income from the nominal wage income of a
group of persons.
2. These are given as:
A. Purchasing power of money = 1/cost of living index number 

 B. Real wages = money wages/cost of living index number X 100

3. It has a wide variety of applications where it is used in fixation and

re-adjustment of wages and salaries of workers. Through this the
employees are compensated for the increased cost of living.

4. They are used by the government for the formulation of various

policies like the price policy, wage policy and general economic
policies.

5. It facilitates the analysis of the markets of particular goods and

services.
 There are two methods that are used in the construction of price index number:
Aggregate expenditure method:   Consumer price index = ∑p1q0/ ∑p0q0 X100
Family budget method:             Consumer price index = ∑PW/ ∑W

Aggregate expenditure method:

The steps involved in this method are :
 Multiply prices of the base year (p0) with quantities of the base year (q0) and add it to

get aggregate expenditure for the base year (∑ p 0q0).

 Multiply prices of the current year (p1) with quantities of the base year (q0) and add it to

get aggregate expenditure of the current year (∑p 1q0).

 Divide aggregate current year’s expenditure (∑p1q0) by aggregate expenditure of base

year (∑p0q0) and multiply it by 100 to get consumer price index number.
   
 Apply the formula: CONSUMER PRICE INDEX = ∑p q / p q *100
Family budget method:

The steps involved in this method are:

1. Calculate price relatives for the current year ( p 1/p0*100) and denote it by P

2. Multiplying the price in the base year (p 0) with quantity in the base year (q0) to calculate the weight of a
commodity, i.e. to get W
3. Multiply the price relative (P) with weight (W) of each commodity and obtain its total to get ∑PW.
4. Obtain the sum total of weights to get ∑W
5. Apply the formula: CONSUMER PRICE INDEX= ∑PW/∑W.
An example to elaborate the same : Constructing the consumer price index number for the year 2015 on
the basis of year 2009, using 1) aggregate expenditure method and 2) family budget method 
ITEMS QUANTITY PRICE (2009)($) PRICE (2015)($)
CONSUMED
(2009)
A 12 50 60
B 8 40 45
C 4 70 80
D 9 70 90
E 5 20 40

F 2 200 200
SOLUTION : CALCULATION OF CPI
ITEMS q0 p0 p1 p1 q 0 W=p0q0 P=p1/p0 PW
*100
A 12 50 60 720 600 120 72000
B 8 40 45 360 320 112.5 36000
C 4 70 80 320 280 114.285 32000
D 9 70 90 810 630 128.57 81000
E 5 20 40 200 100 200 20000
F 2 200 200 400 400 100 40000
2810 2330 281000
1.Aggregate expenditure method:
Consumer price index = ∑ p1q0 / ∑ p0q0 X100

= 2810/2330 X 100
= 120.60
Family budget method:
Consumer price index = ∑PW/ ∑W
= 281000/2330
= 120.60Hence the above concept has been elaborated through the use of
an example.
Hence the above concept has been elaborated through the use
of an example.
6 PRACTICE QUESTION :
Calculate cost of living index for the following data using aggregate expenditure and
family budget method .
Commodities Price in 2011 ($) Price in 2016 ($) Quantity in 2011
A 10 15 15
B 8 12 20
C 20 24 10
D 32 40 5
E 15 20 6
F 12 18 2
G 8 10 1
 Limitations of Index Number
● Provides relative chnages only They are only estimates of relative changes in various events .
They cannot speak the truth as they are only the approximate indicators.

● Lack of perfect accuracyThey are based on sample items . If samples are inadequate or
selectef by erroneous method, index number is bound to give inaccurate result.

● Difference between purpose and method construction When they are constructed for special
purpose in such case it will noy be appropriate for all other purpose and situation.

● Ignore qualtative chnagesWhile construction the price or production index number, no

attention is paid to the changes in quality of the product. Such changes are not reflected in the
index numbers.

● Manipulations are possibleIndex numbers can be constructed in such a manner so that the
desired result is obtained.
FORMULAE AT GLANCE :

1. UNWEIGHTED INDEX NUMBER SIMPLE AGGREGATIVE P01= Σp1/Σp0×100

METHOD

SIMPLE AVERAGE OF PRICE Σ(p1/p0×100/N)

RELATIVE

2. WEIGHTED AGGREGATIVE LASPEYER`S METHOD P01= Σp1q0/Σp0q0×100

METHOD

PAASCHE`S METHOD P01= Σp1q1/Σp0q1×100

3. WEIGHTED AVERAGE OF PRICE P01= ΣRW/ΣW

RELATIVE METHOD

4. CONSUMER PRICE INDEX AGGREGATE EXPENDITURE CPI =Σp1q0/Σp0q0×100

METHOD

FAMILY BUDGET METHOD CPI= ΣPW/ΣW

SOLUTIONS FOR PRACTICE QUESTIONS :
1. CALCULATION OF SIMPLE AGGREGATE PRICE INDEX
COMMODITY
Prices in ($) (2001)(p0) Price in (2007) ($)(p )

Milk (1 litre) $18 $20

Banana (1 dozen) $15 $15

Butter (1 kg) $120 $150

Bread (400 gms) $9 $14

TOTAL Σp0=162 Σp1=199

Price index for the year 2007 with year 2001 as base
P01= Σp1/Σp0×100
=199/162×100
=122.83

The price index number (122.83) reveals that there is a net increase of 22.83%
in prices in the year 2007, compared to the prices in the year 2001
Calculation of simple average of price relatives
COMMODITY
Prices in ($) Price in (2007) ($)(p1 ) P = p1/p0 * 100
(2001)(p0)

Milk (1 litre) $18 $20 111.1

Banana (1 dozen) $15 $15 100

Butter (1 kg) $120 $150 125

Bread (400 gms) $9 $14 155.5

TOTAL P =£(p /p ×100)/N

£p0=162 £p1=199 £(p1/p0×100)=491.6
01 1 0
=491.6/4
=122.83

The price index number (122.83) reveals that there is a net increase of 22.83% in
prices in the year 2007, compared to the prices in the year 2001
2 PRACTICE QUESTION solution :

ITEMS BASE YEAR CURRENT BASE YEAR p0q0 p1q0

PRICE (p0) YEAR PRICE (q0)
(p1)

A 11 15 5 55 75

B 20 20 78 1560 1560

C 3 5 45 135 225

D 10 6 12 120 72

TOTAL ∑p1q0=1870 ∑p0q0=1932

P01(L) = ∑p1q0 ÷ ∑p0q0×100

= 1932÷1870×100
= 103.31
3 practice question solution :

ITEMS BASE YEAR CURRENT YEAR CURRENT YEAR p0q1 p1 q1

PRICE (p0) PRICE (p1) QUANTITY (q1)

A 10 20 25 250 500

B 20 60 5 100 300

C 30 30 15 450 450

D 40 20 6 240 120

TOTAL ∑p0q1 = ∑p1q1 =

1040 1370

P01(P)= ∑p1q1 ÷ ∑p0q1 ×100

= 1370 ÷ 10401 ×100
= 131.73
4 practice question solution :
It should be observed in this problem that, for the base year value and quantity are given whereas, for
the current year value and price are given. Price for the base year and quantity for the current year are to
be computed first in order to compute Fisher’s Index Number.

Value = Price x Quantity

 
Therefore, p0 = Value
Quantity
 
And q0 = Value
Price
Commodities Price [Base year] p0 Quantity [Current year] q 0

A 300/150 = 2 480/4 = 120

B 50/10 = 5 90/6 = 15

C 48/12 = 4 50/5 = 10

D 120/60 = 2 100/2 = 50

E 60/20 = 3 105/3 = 35
Items p0 q0 p1 q1 p1q0 p0q0 p1q1 p0q1

A 2 150 4 120 600 300 480 240

B 5 10 6 15 60 50 90 75

C 4 12 5 10 60 48 50 40

D 2 60 2 50 120 120 100 100

E 3 20 3 35 60 60 105 105

          ∑ p1q0 ∑ p0 q0 ∑ p1q1 ∑ p0q1

= 900 = 578 = 825 = 560

P01 = √ [ ∑p1q0 / ∑p0q0 x ∑p1q1 / ∑p0q1] x 100

= √ [900/578 x 825/560] x 100 = √ [ 1.5571 x 1.473] x

100

= √ 2.2936 x 100 = 1.5145 x 100

TRT is said to be satisfied when, P01 x P10 = 1

P01 x P10 = √ [ ∑p1q0 / ∑p0q0 x ∑p1q1 / ∑p0q1 ] x √ [ ∑p0q1 / ∑p1q1 x ∑p0q0 / ∑p1q0 ]

= √ [900/578 x 825/560 x 560/825 x 578/900]

= √1 = 1
Thus, TRT is satisfied.

FRT is said to be satisfied when,

P01 x Q01 = ∑p1q1 / ∑p0q0

P01 x Q01 = √ [∑p1q0 / ∑p0q0 x ∑p1q1 / ∑p0q1] x [ ∑p0q1 / ∑p0q0 x ∑p1q1 / ∑p1q0]

√ [900/578 x 825/560 x 560/578 x 825/900]

= √ 825/578 x 825/578
= √ [825/578]2= 825/578
= ∑p1q1/∑p0q0

Hence, FRT is satisfied.

5. PRACTICE QUESTION SOLUTION :
COMMODITIES PRICES PRICES QUANTITIES Value p1/p0*100(R) RW
(2011)($) (2016)($) (2011) weighted
(p0q0)W

A 5 8 80 400 160 64000

B 8 14 65 520 175 91000

C 12 18 42 504 150 75600

D 4 5 37 148 125 18500

E 4 5 31 124 125 15500

F 2 4 15 30 200 6000

∑W=1726 ∑RW=270600
 P01 = ∑ RW/ ∑ W
=270600/1726
= 156.77
The index number 156.77 shows the increase of 56.77% in prices in the year 2016 as compared to
year 2011.
6 QUESTION SOLUTION : AGGREGATE EXPENDITURE METHOD
COMMODITY PRICE IN PRICE IN QUANTITY p0q0 p1q0
2011(p0)($) 2016(p1)($) 2011(q0)

A 10 15 15 150 225

B 8 12 20 160 240

C 20 24 10 200 240

D 32 40 5 160 200

E 15 20 6 90 120

F 12 18 2 24 36

G 8 10 1 8 10

TOTAL Σp0q0=792 Σp1q0=1071

Consumer price index of the year 2016

= Σp1q0/Σp0q0×100 = 1071/792×100
=135.22
 FAMILY BUDGET METHOD :
COMMODITY PRICE IN PRICE IN QUANTITY P= p1/p0*100 P0q0 PW
2011(p0)($) 2016(p1) 2011(q0) (W)
($)
A 10 15 15 150 150 22500
B 8 12 20 150 160 24000
C 20 24 10 120 200 24000
D 32 40 5 125 160 20000
E 15 20 6 133.33 90 12000
F 12 18 2 150 24 3600
G 8 10 1 125 8 1000
TOTAL ΣW=792 ΣPW=107100

It shows that there is an increase of 35.22% in prices in the year 2016 as compared to year 2011.
Consumer price index(CPI) for the year 2016
= ΣPW/ΣW
= 107100/792 = 135.22
 2010215- Kiran
Methods of unweighted
method

2010278-NV Sai
Pavan
2010221- SR Kishan 2010229-Preksha Preparation of
Weighted average of Patwa PPT
price relatives method Preparation of PPT
2010285-Sirisha N
2010265-Varsha construction of index
2010247- R numbers
Madhumitha M Tests of
Weighted index adequacy 2010286-Mushkan
numbers Todi
introduction

2010260- Megha
LV
Consumer price
index 2010289-Sauravjeet
Singh
GROUP Preparing of ppt
LEAD BY:
2010265
Varsha R