INDEX NUMBER
Made by
WHAT IS AN INDEX NUMBER
◦ An index number is a statistical device for measuring changes in the
magnitude of a group of related variables
◦ It represents the general trend of diverging ratios, from which it is calculated.
◦ It is a measure of the average change in a group of related variables over two
different situations.
CHARACTERISTICS OF INDEX
NUMBERS
◦ Index numbers are a special type of average that provides a measurement of
relative changes in the level of a certain phenomenon from time to time. It is a
special type of average because it can be used to compare two or more series
which are composed of different types of items or even expressed in different
types of units.
◦ Index numbers are expressed in terms of percentages to show the extent of
relative change.
The advantages of index numbers
◦ Help in formulating policies-Most of the ◦ Facilitates comparative study- To make
economic and business decisions and comparisons with respect to time and
policies are guided by the index numbers. place especially where units are different,
index numbers prove to be very useful.
◦ Help in study of trends
◦ Measurement of purchasing power of
money to maintain standard of living
◦ Helpful in forecasting- used for
forecasting economic and business
activities. ◦ Act as economic barometer
Problems involved in the construction of
index number
◦ Purpose of index numbers- Many different ◦ Selection of sources of data- Depending
types of index numbers are constructed upon the type of index numbers, the
with different objectives. correct source should be selected for data.
◦ Selection of base period ◦ Selection of weights
◦ Selection of commodities- All the items ◦ Selection of an appropriate formula- There
cannot be included in the construction of are various formulas for construction of
an index number. index numbers like Laspeyres’ method,
Paasche’s method, Fisher’s method, and
more.
Periods
◦ Of the two periods, the period with which the comparison is to be made, is
known as the base period.
◦ The value in the base period is given the index number 100
◦ If you want to know how much the price has changed in 2005 from the level in
1990, then 1990 becomes the base.
◦ The index number of any period is in proportion with it
USES OF INDEX NUMBERS
◦ Index number is a special type of averages which helps to measure the
economic fluctuations on price level, money market, economic cycle like
inflation, deflation etc.
◦ Index numbers helps in formulating suitable economic policies and planning
etc
◦ Index numbers are useful in forecasting future economic activity
Types of Index
◦ Price index numbers measure and permit comparison of the prices of certain
goods
◦ Though price index numbers are more widely used, a production index is also
an important indicator of the level of the output in the economy.
◦ Quantity index numbers measure the changes in the physical volume of
production, construction or employment
Un-weighted Index
◦ In the un-weighted index number the weights are not assigned to the various
items used for the calculation of index number.
◦ Two unweighted price index number are given below:
◦ Simple Aggregate Method
◦ Simple Average of Price Relatives Method
Simple Aggregate Method
◦ This method is based on the assumption that various items and their prices are
quoted in same units. Equal importance is given to all the items.
◦ The formula for a simple aggregative price index is given as follows:
Limitations of Aggregate method
◦ This method doesn’t take into account the relative importance of various
commodities used in the calculation of index number since equal importance is
given to all the items.
◦ The different items are required to be expressed in the same unit. In practice,
however, the different items may be expressed in different units.
◦ The index number obtained by this method is not reliable as it is affected by
the unit in which prices of several commodities are quoted.
Simple Average of Price Relatives
Method
◦ This method is an improvement over the previous method as it is not affected
by the unit in which the prices of various commodities are quoted.
◦ The price relatives are pure number and therefore are independent of original
units in which these are quoted
◦ . The price index number using price relatives is defined as follows:
Weighted Index Number
◦ In weighted index number rational weights are assigned to all the items or
commodities.
◦ Such weights indicate the relative importance of the items included in the
calculation of the index
◦ In most cases quantity of usage is the best measure of importance.
◦ To construct a weighted aggregative index, a well-specified basket of
commodities is taken and its worth each year is calculated
Weighted Aggregative Price Indices
◦ In weighted aggregative price indices, the weights are assigned to each item in
the basket in various ways and the weighted aggregates are also used in
different ways to calculate an index
◦ In most cases quantity of usage is used to calculate price index number.
◦ Laspeyre’s price index and Paasche’s price index are the two most important
methods of calculating weighted price indices
Laspeyre’s Method
◦ Laspeyre’s price index number is the weighted aggregative price index number
which uses base year’s quantity as the weights. It is given by:
In general, Laspeyre’s index number answers the question, it provides an
explanation to the question that if the expenditure on base period basket of
commodities was `100, how much should be the expenditure in the current period
on the same basket of commodities?
Weighted Price Relative Method
◦ Under this method price index is constructed on the basis of price relatives and
not on the basis of absolute prices.
◦ s. The price index is obtained by taking the average of all weighted price
relatives. It is given by
Consumer price index
◦ A consumer price index (CPI) measures changes in the price level of a basket
of consumer goods and services purchased by households.4
◦ CPI measures changes in the price level for the specified consumers in the
particular region
◦ CPI can be calculated for industrial workers, urban labours, Agricultural
workers etc.
◦ CPI only indicates the capability to buy it. It may be noted that there cannot be
one CPI for any class or group of the whole country as the retail prices in
different places differ
Wholesale Price Index Number
◦ The Wholesale Price Index or WPI is the price of a representative basket of
wholesale goods
◦ The wholesale price index number indicates the change in the general price
level.
◦ Unlike the CPI, it does not have any reference consumer category
◦ y. WPI with 2011 as base is 156 in March, 2014 means that the general price
level has risen by 56 percent during this period
CONCLUSION
◦ An index number is a statistical measure, designed to measure relative changes
in a variable(s) with time/geographical location/other criteria.
◦ Index Numbers can be calculated for price, quantity, volume etc
◦ The index numbers need to be interpreted carefully as there are several
methods of calculating the index number
◦ The items to be included and the choice of the base period are important for
the calculations. The index numbers are indispensable in economic policy
making.
THANK YOU
