STA 304: Applied Statistics
Amber Asghar
Virtual University of Pakistan
STA 304: Applied Statistics
Lecture No. 3
In the Previous Lecture, we studied
Method of Construction of Un-Weighted Index Numbers
Simple Aggregative Method
Simple Average of Relatives
In the Current Lecture, we will Study
Weighted Index Numbers
Weighted Aggregative Price Index Numbers
Weighted Average of Relatives Price Index Numbers
Weighted Index Numbers
An index number that measures the change in the prices of a
group of commodities when the relative importance of the
commodities (i.e. Weight) has been taken into account, is
called a weighted price index number. Weighted indices are
generally divided into Weighted Aggregative indices and
Weighted Average of relatives indices.
Weighted Index Number
Weighted Aggregative Weighted Average of relatives
indices
Weighted Aggregative Price Index
Numbers
These index numbers are the simple aggregative type with the
fundamental difference that weights are assigned to the various
items included in the index. There are various kinds of weighted
aggregative index numbers are,
Laspeyres Marshall-
Paasche’s Fisher’s
’ Price Edgewort
Price Ideal
Index h Price
Index Index
Index
Laspeyres’ Price Index
This method was derived by Laspeyres’ in 1871. In this method
the weights are determined by quantities in the base.
Paasche’s Price Index
This method was derived by German statistician Paasche’s in
1874. The weights of current year are used as base year in
constructing the Paasche’s Index number.
Example
Construct the following weighted aggregative price index
numbers for 1960 by using 1956 as a base period.
Laspeyres’ index
Paasche’s index
Prices (Rs. Per md.) Quantities (tons)
Commodity
1956 1960 1956 1960
(base)
A 64 75 270 276
B 40 45 124 118
18 21 130 121
C
D 58 68 185 267
Solution
Com. Price Quantity poqo p1q0 p0q1 p1q1
p0 p1 q0 q1
A 64 75 270 276 17280 20250 17664 20700
B 40 45 124 118 4960 5580 720 5310
C 18 21 130 121 2340 2730 2178 2541
D
58 68 185 267 10730 12580 15486 18156
Total 35310 41140 40048 46707
Cont….
(i) Laspeyres’ index numbers
Index for 1960 = = = 116.5
(ii) Paasche’s index numbers
Index for 1960 = = = 116.6
Marshall-Edgeworth Price Index
In this index the numerator consists of an aggregate of the current
years price multiplied by the weights of both of the base year as
well as the current year.
Fisher’s Ideal Index Number
Fisher’s ideal index number is the geometric mean of the
Laspeyres’ and Paasche’s index numbers.
Example
The prices and quantities of three commodities during 1960
and 1964 are given below:
Prices Quantities Produced
(Rs. Per md.) (maunds)
Commodity
1960 (po) 1964 (p1) 1960 (qo) 1964 (q1)
A 3.95 4.25 9,676 10,436
B 34.80 38.94 78 83
C 61.56 59.70 118 116
Compute the Marshall-Edgeworth index numbers and Fisher
Index numbers for 1964, using 1960 as the base period.
Solution
To calculate the Marshal-Edgeworth, first we calculate
the necessary products with 1960 as base year. These
calculations are shown in the table below:
Computation of Weighted Aggregative Price Indices
Com. (p0+q1) p1(q0+q1) p0(q0+q1)
A 20,111 85471.75 79,438.45
B 161 6269.34 5,602.80
C 234 13,969.80 14,40.04
Total 105,710.89 99,446.29
Cont…
Marshall-Edgeworth price index:
= 106.3.
Cont…
Com. Price Quantity po qo p1q0 p0 q1 p1 q 1
p0 p1 q0 q1
A 3.95 4.25 9676 10436 38220.2 41123 41222.2 44353
B 34.80 38.94 78 83 2714.4 3037.32 2888.4 3232.02
C
61.56 59.70 118 116 7264.08 7044.6 7140.96 6925.2
Total
48198.68 51204.92 51251.56 54510.22
Cont…
Fisher’s “Ideal” index numbers:
=
= 106.30.
Weighted Average of Relatives Price
Index Numbers
It is computed multiplying each price relative by its weight,
summing these products and dividing by the sum of the weights.
The important types of the weighted average of relatives price
indices are given below:
Laspeyres’ Price
Index
Laspeyres’ Index Numbers
Where the price relatives are weighted by the total value of
commodities in the base year.
Paasche’s Index Numbers
Where the price relatives are weighted by the total value of
commodities in the given year at base year.
Example
Using the data, compute the weighted average of relatives price
index numbers for 1964 by
Laspeyres’ method
Paasche’s method
Prices Quantities Produced
(Rs. Per md.) (maunds)
Commodity
1960 (po) 1964 (p1) 1960 (qo) 1964 (q1)
A 3.95 4.25 9,676 10,436
B 34.80 38.94 78 83
C 61.56 59.70 118 116
Solution
Com. Price Quantity Price Weights Weighted Price Relatives
relative
po p1 qo q1 p1 po qo poq1 p p
p0 q0 1 p0 q1 1
1960 1964 1960 1964 p0 p0 p0
A 3.95 4.25 9,676 10,436 1.076 38220.2 41222.20 41124.94 44355.09
B 34.80 38.94 78 83 1.119 2714.40 2888.40 3037.41 3232.12
C 61.56 59.70 118 116 0.970 7264.08 7140.95 7046.16 6926.73
Total 48198.68 51251.56 51208.51 54513.94
Cont…
Laspeyres’ index for 1964 =
Paasche’s index for 1964 =
=
Example
Compute Fisher’s price index numbers for 1976 with 1961 as
base from the following data:
Commodity Quantity (units) Value (Rs.)
1961 1976 1961 (p0q0) 1976 (p1q1)
A 100 150 600 1200
B 80 100 400 700
C 60 72 180 432
D 30 33 450 363
Total p q 1630 2695
0 0 p1q1
Solution
Unit prices
p0 q1 p1q0
p0 p1
6 8 800 900
5 7 560 500
3 6 360 216
15 11 330 495
2050 2111
pq 0 1
pq 1 0
Cont…
Fisher’s index numbers for 1976:
2050 2695
100
= 1630 2111
= 1.2577 1.2767 100
= 126.72.
Example
Calculate the index numbers of Marshall-Edgeworth and Fisher’s Ideal type
for the following data.
Base Year Current Year
Price Quantity Price Quantity
Commodity
p0 q0 p1 q1
A 7 70 5 49
B 5 27 7 28
C 10 35 9 29
D 9 50 4 42
E 3 16 10 25
Solution
Base Year Current Year
Commodity Price Quant Price Quant
ity ity
p0 q0 p0 q1 p1q0 p1q1
p0 q0 p1 q1
A 7 70 5 49 490 343 350 245
B 5 27 7 28 135 140 189 196
C 10 35 9 29 350 290 315 261
D 9 50 4 42 450 378 200 168
E 3 16 10 25 48 75 160 250
1473 1226 1214 1120
Cont…
Fisher’s index numbers:
pq 1 0
pq
1 1
100
pq 0 0 pq
0 1
1214 1120
100
= 1473 1226
= 0.8242 0.9135 100
= 86.8.
Cont…
Marshall-Edgeworth index:
pq pq
1 0 1 1
100
p q p q
0 0 0 1
1214 1120
100
= 1473 1226
2334
= 100
2699
= 86.5.
