Index Number
Dr. Surendra Singh Jatav
Department of Economics
BBAU, Lucknow
Meaning of Index Numbers
• The value of money does not remain constant over time. It rises or
falls and is inversely related to the changes in the price level.
• A rise in the price level means a fall in the value of money and a fall in
the price level means a rise in the value of money.
• Thus, changes in the value of money are reflected by the changes in
the general level of prices over a period of time.
• Changes in the general level of prices can be measured by a statistical
device known as ‘index number.’
Selection of Method
• The selection of a suitable method for the construction of index
numbers is the final step. There are two methods of computing the
index numbers:
• (a) Simple index number: Simple aggregate method, or by (ii) simple
average of price relative’s method.
• (b) Weighted index number. weighted average of price relative’s
method.
• The choice of method depends upon the availability of data, degree of
accuracy required and the purpose of the study.
Classification of Index
• Price index number
• Quantity index number
• Value index number
• Special purpose index number
Price Index Number
• Wholesale Price Index Numbers: The Wholesale Price Index (WPI) is a
measure of the rate at which large purchase transactions occur,
usually for further sale.
• Retail or Consumer Price or Cost of Living Index Numbers: Consumer
price indexes (CPIs) are index numbers that measure changes in the
prices of goods and services purchased or otherwise acquired by
households, which households use directly, or indirectly, to satisfy
their own needs and wants.
Price index number
• Where,
• = Price index number for the current year based on the base year.
• = Sum of current year prices.
• = Sum of base year prices.
Quantity Index number
• The quality index number is defined as:
• Where,
• Quantity index number
• Sum of current year quantities
• Sum of base year quantities
Value index number
• The value index number is defined thus:
• Where,
• Value index number
• Sum of the product of current year price and quantity
• Sum of the product of base year price and quantity
• P = Price index number
• Q = Quantity index number
Methods of Construction of
Price Index Numbers
• The methods of constructing price index numbers are classified into
two broad categories:
• Unweighted Index Numbers
• Simple aggregate method
• Simple average of price relative method
• Weighted index numbers
• Simple aggregate method
• Simple average of price relative method
Unweighted Simple Aggregate
Method
• Under this method, the sum of current year prices is expected as a
percentage of the sum of base year prices of commodities.
• In symbol,
• Where,
• = Price index number for the current year based on the base year.
• = Sum of current year prices.
• = Sum of base year prices.
Construct index number from the
following data by using simple
aggregate method.
Commodity Price in 2020 Price in 2021
Commodity
($) ($)
M 4 9
M 4 9
N 3 8 N 3 8
O 4 7
O 4 7
P 6 8
P 6 8
𝑃 01 =
∑ 𝑃1
∗ 100 𝑃 01 =
32
∗ 100 𝑃 01 =
3200
= 17
𝑃 01 =188.24
∑ 𝑃0 17 17
Unweighted Simple average of
price relative method
• Where,
• = Price index number for the current year based on the base year
• = Relative prices
• = Current Year Price
• = Base Year Price
Construct an index number from the following data
by using simple average of price relative method.
Article Prices in 2021 Prices in 2022 Article
1 6 12
(Rs.) (Rs.)
2 8 15
1 6 12
3 4 11
2 8 15 4 6 10
3 4 11 5 7 9
4 6 10 6 5 7
5 7 9 N=6 1097.74
6 5 7
Weighted Index Numbers
• Laspeyres’ Index Number
• Paasche’s Index Number
• Fisher’s Index Number
• Dorbish-Bowley’s Index Number
• Marshall-Edgeworth’s Index Number
• Kelly’s Index Number
Methods Formula
Laspeyres’ Index Number
Paasche’s Index Number
Fisher’s Index Number
Dorbish-Bowley’s Index Number
Dorbish-Bowley’s Index Number
Marshall-Edgeworth’s Index Number
Kelly’s Index Number
Weighted Average of price relative method
Where, P or I = price relatives of the current year = V = value weights of the base year (
