11
INDEX NUMBERS
CONTENTS
Simple Price Index 92
Aggregate Price Indices 93
Weighted Aggregate Price Indices 94
Consumer Price Index (CPI) and Inflation 96
Stock Exchange Index 98
Indices of Development 99
Human Development Index (HDI) 100
Multidimensional Poverty Index 101
Base Shifting (or Rebasing) of Index Numbers 103
Deflating the Index Numbers 103
Criteria of a Good Index Number 103
An index number is a statistical measure of the change in a variable from one
period to another. Price indices, quantity indexes, value indexes, and socio-
economic indexes are examples of index numbers.
Index number construction combines time series data that can't be added due to
different units. To measure composite changes in production or prices, relatives
(percentage changes) are averaged, allowing for comparable and additive data.
Weights are applied based on importance. The resulting average relative is called
an index number, expressed relative to a specified base period, allowing for
meaningful comparisons and analysis of business conditions.
Price Relatives: A price relative is an index number that compares the price of
a single commodity in a given period to its price in a base or reference period.
Quantity or Volume Relatives: These are like price relatives but compare
quantities or volumes instead of prices, such as production or consumption.
Value Relatives: Value relatives compare the total value of a commodity
between two periods, incorporating both price and quantity.
Link and Chain Relatives: Link relatives express an index as a percentage of
the previous period, forming a chain index by multiplying successive link
relatives.
Two basic methods are used in the calculation of index numbers:
i. Simple (unweighted) Aggregate Method: Expresses aggregate prices as a
percentage of base year prices. Easy and quick, but it ignores differing
importance of commodities and can't handle different units.
ii. Weighted Aggregate Method: Assigns weights to commodities based on
importance. Allows for differing importance and units.
Weighting is essential to ensure the index accurately reflects the changes being
measured.
Example: A price index measures the percentage change in the price of an item
from one period to another. A price index could be simple or aggregate.
S I M P L E P R IC E I N D E X
A simple price index measures the percentage change in the price of a single
commodity from one period to another. The base period is the point in time in
the past against which all comparisons are made.
Chapter 11| Index Numbers 93
Simple price index:
𝑷𝒏
𝑰𝒊 = × 𝟏𝟎𝟎
𝑷𝟎
Where 𝐼𝑖 = price index for year i; 𝑃𝑛 = price for year i; 𝑃0 = price for the base
year.
EXAMPLE 11.1
Consider the price of fuel in Nigeria from 2010 to 2018 as shown in the following
table.
Year 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fuel Price 65 65 97 97 97 87 145 145 145
a) Compute the simple price index for 2015, using 2010 as the base year.
b) Compute the simple price index for 2018, using 2015 as the base year.
S O L U T I O N tips
a) The simple price index for 2015 is
𝑃 87
𝐼𝑖 = 𝑛 × 100% = × 100% = 133.85
𝑃0 65
Thus, fuel price was 33.85% higher in 2015 than in 2010.
b) The simple price index for 2018 is
𝑃𝑛 145
𝐼𝑖 = × 100% = × 100% = 166.67
𝑃0 87
Thus, fuel price was 66.67% higher in 2018 than in 2015.
AGGREGATE PRICE INDICES
An aggregate price index measures the percentage change in the prices for a
group of commodities from one period to another. The unweighted aggregate
price indices and weighted aggregate price indices are the two types of aggregate
price indices. An unweighted aggregate price index places equal weight on
all the items in the market basket.
Unweighted aggregate price index:
∑ 𝑷𝒏
𝑰𝒖 = × 𝟏𝟎𝟎
∑ 𝑷𝟎
Where 𝐼𝑢 = value of the unweighted price index at time t; ∑ 𝑃𝑛 = sum of the prices
of the commodities at time t; ∑ 𝑃0 = sum of the prices of the commodities at time
0.
EXAMPLE 11.2
The table shows the mean prices for three earpiece brands for selected periods
from 2000 to 2025
Earpiece 2000 2005 2010 2015 2020
Sounder 97 54 96 61 75
Playtrix 84 83 87 87 98
Ringer 69 93 72 69 99
Calculate the unweighted aggregate price index for (a) 2010 using 2000 as the
base period. (b) 2020 using 2010 as the base period.
S O L U T I O N tips
a) The unweighted aggregate price index for 2010 using 2000 as the base
period is
94 Olaniyi Evans | University Mathematics
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