INDEX

NUMBERS
PRESENTED BY
MOHD.ARISH
ADITYA PRATAP
SINGH
 INTRODUCTION

 Index numbers are devices which measure the change in the

level of a phenomenon with respect to time, geographical
location or some other characteristic.
Change in production, export, national income, number of
road accidents are studied with the help of index number.

“ An index number is a statistical measure designed to show

changes in a variable or a group of related variable with respect
to time, geographical location or other characteristics such as
income profession, etc.”
Sir Spiegel
 USES OF INDEX NUMBERS

• Help in Studying Trends.

• Help in policy formulation.

• Help In measuring the purchasing power of

money.
 Classification of Index
Numbers
o PRICE

o QUANTITY

o VALUE
METHODS OF INDEX
NUMBERS
 Simple Aggregative
Method
• This method is used to construct a price index, the
total of current year prices for the various
commodities are divided by the total of base year
prices and the quotient is multiplied by 100.

P 01 =
∑ P1
×100
∑P 0

∑P = Total of Current year prices for various

1

∑ Pcommodities.
0

= Total of base year prices for various

commodities.
 Simple Aggregative
Method
• Illustration :
From the following data construct an index
numbers for 2008 taking 2007 as base.

Commodity and Price (Rs) 2007 Price (Rs) 2008

unit
Butter(kg.) 110 120
Cheese(kg.) 75 80
Milk(lt.) 13 13
Bread(1) 9 9
Eggs(doz.) 18 20
Ghee(1 tin) 850 860
 • Solution :
Commodity Price in 2007
P0 Price in 2008
P1
Butter(kg.) 110 120
Cheese(kg.) 75 80
Milk(lt.) 13 13
Bread(1) 9 9
Eggs(doz.) 18 20
Ghee(1 tin) 850 860
Total
∑ P = 1075
0
∑P 1 = 1102

∑ P = 1075
0
∑P 1 = 1102

P 01 =
∑ P1
×100 =
1102
×100 = 102 .51
∑P 0 1075
This means that as compared to 2007, in 2008 there is
net increase in price of commodities included in the
 Simple Average of Price Relative
Method
 The current year price is expressed as a price relative of
the base year price. These price relatives are then
averaged to get the index number. The average used
could be arithmetic mean, geometric mean.
Index numbers when arithmetic mean is used
 P1 
∑ P 0
 ×100 
P 01 = N


N is the number of items

When geometric mean is used
 P1 
∑  P0
log  ×100 
LogP 01 =   P1  
N  ∑ log ×100 
If represented by P then
P 01 = anti log 

 P0 
N


P1  
P = × 100
P0
= anti log
∑ log P
N
 From the following data construct an index
numbers for 2008 taking 2007 as base. Compute
price index by simple avg. of price relatives
method based on (a) arithmetic mean and (b)
geometric mean.

Commodity and Price (Rs) 2007 Price (Rs) 2008

unit
Butter(kg.) 110 120
Cheese(kg.) 75 80
Milk(lt.) 13 13
Bread(1) 9 9
Eggs(doz.) 18 20
Ghee(1 tin) 850 860
 Solution:
(a)Price index based on simple avg. of price relatives
Commodity Price (Rs) Price (Rs) P1
and unit 2007 2008 ×100
P0
Butter(kg.) 110 120 109.09
Cheese(kg.) 75 80 106.67
Milk(lt.) 13 13 100.00
Bread(1) 9 9 100.00
Eggs(doz.) 18 20 111.11
Ghee(1 tin) 850 860 101.08

N =6 P1
∑ P 0 ×100
=628.05
P1
∑P 0 ×100 628 .05
P 01 = = =104 .67
N 6
(b) Price index number based on geometric mean of price relatives
Commodit Price (Rs) Price (Rs) P1
×100 log P
y and unit 2007 2008 P0

Butter(kg.) 110 120 109.1 2.0378

Cheese(kg.) 75 80 106.7 2.0280

Milk(lt.) 13 13 100.0 2.0000

Bread(1) 9 9 100.0 2.0000
Eggs(doz.) 18 20 111.1 2.0457
Ghee(1 tin) 850
N =6
860 101.1
∑log P
2.0051

 ∑ log P  12.1166 
P 01 = AL   = AL   = AL2.0194 = 104.57
 N   6  =12.1166
Weighted Index Numbers
• Weighted index numbers has been
stated earlier are those numbers in
which rational weights are assigned
to various chain in trends. The
weights assigned indicate the
relative importance of various items.
 Weighted Aggregative Index
Numbers
• These index are the simple aggregative type with
the fundamental difference that weight are
assigned to various items include in various
method of assigning weights.
some of the important methods are :
• Laspeyres method
• Paasche’s method
• Dorbish and Bowley’s method
• Fisher ideal method
• Marshall Edgeworth method
• Kelly’s method
 Laspeyers method
• This method was devised by Laspeyers in 1871. In
this method the weights are determine by
quantities in the base. It is based on fixed weights
of the base year.
P 01 = ∑p q
1 0
×100
∑p q
o 0

Paasche’s method
• The main draw back is Paasche’s method is that
every time an index number is constructed weights
have to be determined

P 01 =
∑ pq1
×100
1

∑pq 0 1
 Dorbish and Bowley’s
method
• This index take into account both the base year as well as
the current year weights

L+ P
P 01 =
2
L=Laspeyers Index, P=Paasche’s
Index

∑pq + ∑pq
1 0 1 1

P 01 =
∑pq ∑pq
0 0 0 1
× 100
2
 Fisher’s ideal index
Fisher ideal index number is the geometric mean of
the Laspeyres and Paasche's index number.

∑p q × ∑p q
P 01 =
1 0 1 1
×100
∑p q ∑p q
o 0 0 1

or

P 01 = L × P
this is known as “ideal” because of following reason :
1.It is based on geometric mean
2.It takes both current & base year prices and quantities
 Marshall-Edgeworth
method
 In this method also both the current as well as
base year price and quantities are considered.

P = ∑ pq +∑ pq
1 0
× 100
1 1

∑ p q +∑ p q
01
0 0 0 1

Numerator consist of aggregate of current year price

multiplied by weight of both the base year as well
as current year.
denominator consist of the base year price
multiplied by the sum of base year & current years
weight.
 Kelly’s method
• Truman L. Kelly has suggested the following
formula for constructing index number :

∑ p q ×100
1

P 01 =
∑pq 0
• Illustration :
The following data relate to the prices & quantities of
4 commodities in the years 2007 & 2008. construct
the following index number of price for the year
2008 by using 2007 as the base year.
(1) Laspeyres Index (2) Paasche’s Index (3) Dorbish
& Bowley’s Index (4) Fisher Ideal Index (5)
Marshall-Edgeworth Index .
Commodity 2007 2008
Price Quantit Price Quantit
y y
A 2 8 4 6
B 5 10 6 5
C 4 14 5 10
D 2 19 2 13
 Solution: Calculation of various indices

Commo 2007 2008

dity p 0 qo p1 q1 p1q 0 p0q0 p 1 q1 p 0 q1

A 2 8 4 6 32 16 24 12
B 5 10 6 5 60 50 30 25
C 4 14 5 10 70 56 50 40
D 2 19 2 13 38 38 26 26
∑p q ∑p q ∑p q ∑p q
1 0 0 0 1 1 0 1

=200 =160 =130 =103

• Laspeyres Method:

P 01 =
∑pq 1 0
×100 =
200
×100 =125
∑p q 0 0 160
• Paasche’s Method:

P 01 =
∑pq 1 1
×100 =
130
×100 =126 .21
∑p q 0 1 103
• Bowley’s Method:
∑p q
1 0
+ ∑ pq 1
200 130
1

+
P 01 =
∑ pq
0 0 0
∑p q
1
×100 = 160 103 ×100
2 2
1.25 +1.2621 2.5121
= ×100 = ×100 =125 .605
2 2
• Fisher’s Ideal Method:

P 01 =
∑p q 1 0
×
∑pq
1 1
×100
∑p q 0 0
∑p q
0 1

200 130
= × ×100
160 103
= 1.578 ×100
=1.256 ×100
=125 .6
• Marshall-Edgeworth Method:

∑ (q + q ) p
0 1 1
P 01 = ×100
∑( q + q ) p
0 1 0

=
∑ p q +∑p q
1 0
×100
1 1

∑p q +∑p q
0 0 0 1

200 +130
= ×100
160 +103
330
= ×100
263
= 125 .475
 Weighted Average of Price
Relative Index Numbers
• In weighted Average of relative, the price
relatives for the current year are calculated on
the basis of the base year price. These price
relatives are multiplied by the respective weight
of items. These products are added up and
divided by the sum of weights
∑ PVarithmetic mean of price relative
• Weighted
P 01 =
∑V

P=Price relative
V=value weight p1
P= ×100
p0
• Weighted geometric mean of price
relative  ∑V . log P 
P 01 = A.L. 
 ∑V 

• From the following data compute price index by using

weighted average of price relative method use (1)
arithmetic mean (2) geometric mean to show the
difference between the two result.
Commodity p0 (Rs) q0 (Rs) p1 (Rs)
Sugar 18.00 20.00 20.00
Flour 12.00 40.00 14.00
Milk 15 10lt. 16

(a)Index number using weighted arithmetic mean of price relatives:

 (a)Index number using weighted arithmetic mean of
price relative
Commo p1
dity (Rs) (Rs) (Rs) ×100
p0
p0 q0 p1 p0q0 =
V p pv
Sugar 18.00 20.00 20.00 360 111.11 39999.6
Flour 12.00 40.00 14.00 480 116.67 56001.6
Milk 15 10lt. 16 150 106.67 16000.5

∑ V = 990 ∑ pv =
112001.7

P 01 =
∑ pv 112001.7
= = 113.13
∑V 990
This means that there has been a 13.13%increase in
price over the base level
)Index number using geometric mean of price relative
Comm p1
odity (Rs) (Rs) p0q0 p0
×100
(Rs)
p0 q0 p1 V p LogP V .LogP
Sugar 18.00 20.00 20.0 360 111.1 2.046 736.56
0
Flour 12.00 40.00 14.0 480 116.6 2.067 992.16
0
Milk 15 10lt. 16 150 106.7 2.028 304.20

∑V .LogP
∑ V = 990 =2032.92
∑V .Log P   2032 .92 
P 01 = A.L.  = A.L. 

 ∑ V 
  990 

= A.L.2.0535 = 113.11
 Quantity or Value Index
Numbers
• The quantity index number measure average
change in quantities and enable us to compare in
physical quantity of goods produced or sold
If a quantity index number is prepared by using
the Laspeyres method it would be

Q 01 =
∑q p
1 0
×100
∑q p
0 0
• When Paasche’s formula is used

Q 01 =
∑ qp 1
× 100
1

∑q p 0 1

• When fisher formula is used

Q 01 =
∑ q p × ∑ q p × 100
1 0 1 1

∑q p ∑q p
0 1 0 1
 Value Index Numbers
• Value is the product of price and quantity. A
simple ratio is equal to the value of the current
year divided by the value of base year. If the ratio
is multiplied by 100 we get the value index
number.

V=
∑ pq
× 100
1 1

∑pq 0 0
 Reference books
• B.M.AGGARWAL
• S.P.GUPTA
O U
Y
N K
H A