Index number

Index number is a statistical measure designed to show changes in a variable or group of

related variables with respect to time, geographical location or other characteristics. A
collection of index numbers for different years, locations is called an index series.
Obviously, the index series showing changes in business and management variables
play an important role in forecasting and planning in these areas.

Characteristics of index numbers –

(i) These are expressed in percentages.

(ii) These are relative measures.
(iii) Index numbers are specialized averages.
(iv) Index number measure changes which are not directly
measurable.

Uses of index numbers

The important uses of index numbers are as follows:

(i) They are economic barometers.

(ii) They measure comparative changes.
(iii) They help in forecasting.
(iv) They measure the purchasing power of money.
(v) They measure the real gross national product.

Simple aggregate method for computing index numbers

This is the simplest method of computing index numbers. According to this

method the total of the current year prices for various commodities is expressed
as a percentage of the total of the base year prices for these commodities.
∑𝑃
Simple aggregate price index P0n = ∑ 𝑃𝑛 × 100
0
Here, P0n = current year price index
∑Pn = the total of commodity prices in the current year
∑P0 = the total of commodity prices in the base year

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Weighted aggregate index numbers

In this method, appropriates weights are assigned to various commodities which

reflect their relative importance in the group. A reasonable assumption is to
consider the quantities consumed or produced as weights. If ‘w’ is the weight
attached to commodity then a general weighted price index can be formulated as
under:
∑𝑃 𝑊
Weighted aggregate price index = 𝑃0𝑛 = ∑ 𝑃𝑛𝑊 × 100
0
Here, P0n = current year price index
∑Pn = the total of commodity prices in the current year
∑P0 = the total of commodity prices in the base year
W = Weights attached to commodities

Laspeyres’ price index number or Base Year Method –

Taking the quantity of the base year, i.e, q0 as weight in the weighted aggregate
price index general formula, we get Laspeyres’ price index number as:

Laspeyres’ Price Index = 𝑃0𝑛 = ∑ 𝑃𝑛𝑞0 × 100

∑𝑃 𝑞
0 0

Paasche’s price index number or Current Year Method –

Taking the quantity of the current year, i.e, qn as weight in the weighted aggregate
price index general formula, we get Paasche’s price index number as:

Paasche’s Price Index = 𝑃0𝑛 = ∑ 𝑃𝑛𝑞𝑛 × 100

∑𝑃 𝑞
0 𝑛

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 Marshall-Edgeworth’s price index number –
𝑞 +𝑞
Taking the average of base year and current year quantities( 0 2 𝑛) as weight in the
weighted aggregate price index general formula, we get Marshall-Edgeworth’s
price index number as:
𝑞 +𝑞
∑ 𝑃𝑛 ( 0 𝑛 )
Marshall-Edgeworth’s Price Index = 𝑃0𝑛 = 2
𝑞0 +𝑞𝑛 × 100
∑ 𝑃0 ( )
2

∑ 𝑃𝑛 𝑞0 +∑ 𝑃𝑛 𝑞𝑛
𝑃0𝑛 = ∑ 𝑃0 𝑞0 +∑ 𝑝0 𝑞𝑛
× 100

Bowley’s price index number –

Taking the arithmetic mean of laspeyres’ and Paasche’ index numbers as weight
in the weighted aggregate price index general formula, we get Bowley’s price
index number as:

1 ∑ 𝑃𝑛 𝑞0 ∑ 𝑃𝑛 𝑞𝑛
Bowley’s Price Index =𝑃0𝑛 = [ ∑ +∑ ] 𝑥100
2 𝑃0 𝑞0 𝑃0 𝑞𝑛

Fisher’s ideal price index number –

Fisher’s ideal price index number is defined as the geometric mean of Laspeyres’
and Paasche’s index numbers

∑ 𝑃𝑛 𝑞0 ∑ 𝑃𝑛 𝑞𝑛
Fisher’s Price Index = P0n = √ ∑ ×∑ × 100
𝑃0 𝑞0 𝑃0 𝑞𝑛

Example-

Construct an index for the year 2002 taking 1999 as base year from the data given
below:

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 Commodity Price in 1999 (Rs) Price in 2002 (Rs)

P 60 70

Q 70 60

R 50 40

S 40 40

Solution-

Commodity Price (1999) P0 Price (2002) Pn

P 60 70

Q 70 60

R 50 40

S 40 40

∑P0 = 220 ∑Pn = 210

By simple aggregate method,

P0n = ∑∑ 𝑃𝑃𝑛 × 100 = 210

220
× 100 = 95.45
0

It means there is net decrease of (100-95.45) = 4.5% in prices in 2002 as compared to

prices in 1999.

Example-

From the following data calculate price index number for 2007 with 2006 as base by
(i) Laspeyres’ method (ii) Paasche’s method (iii) Marshall-Edgeworth method (iv)
Fisher’s ideal method, (v) Bowley method

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 2006 2007
Commodities
Price Quantity Price Quantity

A 20 8 40 6

B 50 10 60 5

C 40 15 50 15

D 20 20 20 25

Solution-

Commodity Base Year Current Year Pnq0 P0q0 Pnqn P0qn

Price (P0) Quantity Price Quantity
(q0) (pn) (qn)
A 20 8 40 6 320 160 240 120
B 50 10 60 5 600 500 300 250
C 40 15 50 15 750 600 750 600
D 20 20 20 25 400 400 500 500
∑ Pnq0 ∑ P0q0 ∑ Pnqn ∑ P0qn
=2070 =1660 =1790 =1470

∑ 𝑃𝑛 𝑞0 2070
(𝑖)Laspeyres' Price Index = 𝑃0𝑛 = × 100 = 1660 × 100 = 124.70
∑ 𝑃0 𝑞0

∑ 𝑃𝑛 𝑞𝑛 1790
(ii)Paasche’s Price Index = 𝑃0𝑛 = × 100 = × 100 = 121.77
∑ 𝑃0 𝑞𝑛 1470

∑ 𝑃𝑛 𝑞0 + ∑ 𝑃𝑛 𝑞𝑛 2070 + 1790
(iii)Marshall-Edgeworth's Price Index 𝑃0𝑛 = × 100 = × 100 = 123.32
∑ 𝑃0 𝑞0 + ∑ 𝑝0 𝑞𝑛 1660 + 1470

∑ 𝑃𝑛 𝑞0 ∑ 𝑃𝑛 𝑞𝑛 2070 1790
(iv)Fisher's ideal index = √ × × 100 = √ × × 100
∑ 𝑃0 𝑞0 ∑ 𝑃0 𝑞𝑛 1660 1470
= 123.24

1 ∑ 𝑃𝑛 𝑞0 ∑ 𝑃𝑛 𝑞𝑛 1 2070 1790
(𝑣)Bowley's Price Index =𝑃0𝑛 = [ + ] × 100 = [ + ] = 123.235
2 ∑ 𝑃0 𝑞0 ∑ 𝑃0 𝑞𝑛 2 1660 1470

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 Example-

From the following data calculate price index number for 2009 with 2000 as base year
by

(i) Laspeyre’s method

(ii) Paasche’s method
(iii) Marshall-Edgeworth method
(iv) Fisher’s method
(v) Bowley’s method

Commodity Base Year[2000] Current year [2009]

Price Quantity Price Quantity

A 10 30 12 50

B 8 15 10 25

C 6 20 6 30

D 4 10 6 20

Solution-
Commodity Base Year Current Year
Price Quantity Price Quantity Pnq0 P0q0 Pnqn P0qn
(P0) (q0) (Pn) (qn)
A 10 30 12 50 360 300 600 500
B 8 15 10 25 150 120 250 200
C 6 20 6 30 120 120 180 180
D 4 10 6 20 60 40 120 80
∑ Pnq0 ∑ P0q0 ∑ Pnqn ∑ P0qn
=690 =580 =1150 =960

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 (i).Laspeyre’s method:

∑ 𝑝𝑛 𝑞0 690
𝑝0𝑛 = × 100 = × 100 = 118.96
∑ 𝑝0 𝑞0 580

(ii). Paasche’s method:

∑ 𝑝𝑛 𝑞𝑛 1150
𝑝0𝑛 = × 100 = × 100 = 119.79
∑ 𝑝0 𝑞𝑛 960

(iii). Marshall-Edgeworth method:

∑ 𝑝𝑛 𝑞0 + ∑ 𝑝𝑛 𝑞𝑛 690 + 1150
𝑝0𝑛 = × 100 = × 100 = 119.48
∑ 𝑝0 𝑞0 + ∑ 𝑝0 𝑞𝑛 580 + 960

(iv). Fisher’s method:

∑ 𝑝𝑛 𝑞0 ∑ 𝑝𝑛 𝑞𝑛 690 1150
𝑝0𝑛 = √[ × ] × 100 = √ × × 100 = 119.37
∑ 𝑝0 𝑞0 ∑ 𝑝0 𝑞𝑛 580 960

(v). Bowley’s method:

1 ∑ 𝑝𝑛 𝑞0 ∑ 𝑝𝑛 𝑞𝑛 1 690 1150 1
= [ + ] × 100 = [ + ] × 100 = (2.39) × 100 = 119.5
2 ∑ 𝑝0 𝑞0 ∑ 𝑝0 𝑞𝑛 2 580 960 2

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Chain Indexes

Chain index for current year 

Link relative of current year  Chain index of previous year 
100

Price relative for the current period

Link relative   100
Price relative for the previous period

Example –

Construct an index by the chain base method base on the following data of the
wholesale prices of a certain commodity.

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Price 37 39 43 48 48 52 48 49 54 56 87

Solution-

Chain base indexes

Year Price Link Relative Chain Base Index Numbers

2001 37 100 100

2002 39 (39/37)x100 = 105.41 (105.41x100)/100 =105.41

(110.76x105.41)/100 =
2003 43 (43/39)x100 = 110.26
116.23

2004 48 (48/43)x100 = 111.63 (111.63x116.23)/100 = 129.75

2005 48 (48/48)x100 = 100 (100x129.75)/100 = 129.75

2006 52 (52/48)x100 = 108.33 (108.33x129.75)/100 = 140.56

2007 48 (48/52)x100 = 92.30 (92.30x140.56)/100 = 129.73

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 (102.08x129.73)/100
2008 49 (49/48)x100 = 102.08
=132.42

(110.20x132.42)/100
2009 54 (54/49)x100 = 110.20
=145.92

2010 56 (56/54)x100 = 103.70 (103.70x145.92)/100 = 151.31

2011 57 (57/56)x100 = 101.79 (101.79x151.31)/100 = 154.01

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