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CAF : BUSINESS MATHEMATICS

TOPIC : INDEX NUMBERS

Q. What do you mean by Index numbers and what are its uses?
Ans. Index numbers are a special type of averages. Averages can be used to compare two or more
series. But we can use them only when two series are expressed in the same unit. Index
numbers were originally used to measure the change in the price level. Changes in the price
level indicates the change in the purchasing power of money. Price level changes inversely
with the changes in the value of money. When the value of money decreases, the price level
increases. Thus index numbers are meant to study the changes in the effect of such factors
which cannot be measured directly. They are used to measure the changes in almost all fields.
Uses :
We can use them to see how far the cost of living has gone up on the last ten years. We can
also measure the change in the industrial production. Workers’ wages are related to cost of
living index number. Index numbers give us the idea about real wages. If the index number
goes up their wages are adjusted to a certain extent. Businessmen and government agencies
can study the change in the general price level and frame their own price policy. Economists
have to study the movements of the general price levels, as also the changes in the specific
groups to build and test their theories. The index number is the only tool with which the
movement of all the prices can be measured. The price level is measured in order to control it.
Index numbers are indicators of economic stability of a country and they must be kept within
limits. We can compare the economic conditions of different countries with the help of index
numbers. Indices of industrial production give us the idea about the progress in industrial
fields. Indices of business activity throw light on general economic progress.

LIST OF FORMULAE
1) Simple Aggregate Method
 p1
a) Price Index (P01) = X 100
 p0
 q1
b) Quantity Index (Q01) = X 100
 q0
 p1q1
c) Value Index (V01) = X 100
 p0q0

2) Simple Average of Relatives Method

I p1
a) P01 = N where I = p X 100
0
I q1
b) Q01 = N where I = q X 100
0

3) Weighted Aggregate Method

a) Laspeyre’s Index Number (Base Year)
 p1q0
P01 = X 100 …………. Price Index
 p0q0
 q1p0
Q01 = X 100 …………. Quantity Index
 q0p0

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

b) Paasche’s Index Number (Current Year)

 p1q1
P01 = X 100 …………. Price Index
 p0q1
 q1p1
Q01 = X 100 …………. Quantity Index
 q0p1

c) Dorbish-bowley’s Index Number (A. M. of L and P)

L+P
P01 = …………. Price Index
2
 p1q0  p1q1
+
 p0q0  p0q1
= x 100
2
L+P
Q01 = 2 …………. Quantity Index
 q1p0  q1p1
+
 q0p0  q0p1
= x 100
2

d) Fisher’s Index Number (G. M. of L and P)

P01 = LxP …………. Price Index
 p1q0  p1q1
= x X 100
 p0q0  p0q1
Q01 = LxP …………. Quantity Index
 q1p0  q1p1
= x X 100
 q0p0  q0p1

e) Marshall-Edgeworth Index Number

 p1q0 +  p1q1
P01 = X 100 …………. Price Index
 p0q0 +  p0q1
 q1p0 +  q1p1
Q01 = X 100 …………. Quantity Index
 q0p0 +  q0p1
f) Walsch’s Index Number
 p1 q0q1
P01 = x 100 …………. Price Index
 p0 q0q1
 q1 p0p1
Q01 = x 100 …………. Quantity Index
 q0 p0p1

4) Cost of Living Index Number

a) Aggregate Expenditure Method
 p1q0
Consumer Price Index = X 100
 p0q0
b) Family Budget Method
 Iw
Consumer Price Index =
w

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

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5) Purchasing Power of Money =
Cost of Living Index Number

Money Wages
6) Real Wages = x 100
Cost of Living Index

EXERCISE

Q.1. For each of the following examples, taking the smallest year as the base, find the index
numbers for the other years, using simple aggregative method.
1) Commodity I II III IV V
2001 Base Year 36 33 105 39 64
2006 Current Year 41 40 121 52 102

2) Wholesaler price per 9 kgs.

Food Items
1980 (base) 1985 (current)
Onion 15 23
Potato 20 25
Tomato 26 30
Dalda 70 105
Palm Oil 109 133
Coconut Oil 180 224
Ghee 250 300

3) Commodities Price in 1990 Price in 2002

A 12 38
B 28 42
C 10 24
D 26 30
E 24 46

4) Price in `
Items Units
2000 2005
Wheat Quintal 500 600
Rice Quintal 400 430
Dal Quintal 700 770
Milk Litre 20 32
Clothing Meter 60 68

5) Average Prices in 1000’s

Commodity
2000 2003 2006
Trucks 800 830 850
Cars 176 200 215
Three Wheelers 100 127 115
Two Wheelers 44 43 45

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

6) Average Prices in 1000’s

Items
1998 2000 2005
Stereo 10 6 5
T.V. 30 20 15
Computer 80 50 25
Mobile Handset 8 6 5

7) Securities at Price for 1 Unit in `

Stock Market 1/1/2000 1/1/2003 1/1/2006
A 160 180 210
B 2400 35 8
C 800 550 850
D 3500 2000 4000
E 150 600 220

8) Real Estate Average House Prices in lacs

Area wise 1990 1998 2006
A 100 65 250
B 35 22 75
C 5 7 12
D 12 11 25

9) Securities at Price for 1 Unit in `

Stock market 1988 1991 1994
A 650 3500 700
B 1200 1350 1300
C 530 4700 200
D 270 5050 100
E 1450 2300 1500

10) Price per unit

Food Items Units
2004 2005 2006
Potato Kg 10 12 14
Onion Kg 8 28 10
Tomato Kg 12 25 16
Eggs Dozen 24 2 26
Banana Dozen 18 20 24
[Ans. 1) 128.519; 2) 125.37; 3) 180; 4) 113.09; 5) 107.14, 109.375; 6) 64.06,
39.06; 7) 48, 75.435; 8) 69.078, 238.157; 9) 412.195, 92.68; 10) 120.83, 125]

Q.2. The index number by the method of aggregates is given in each of the following examples.
Find the value of x each case.
1) Commodity A B C D E
Base Year 12 28 x 26 24
Current Year 38 41 25 36 40
Index Number = 180.

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

2) Commodity I II III IV V
Base Year 3 16 40 7 14
Current Year 5 25 35 10 x
Index Number is 112.5.
3) Commodity I II III IV V
Base Year 40 80 50 x 30
Current Year 60 90 70 110 30
Index Number is 120.
[Ans. 1) 10 2) 15 3) 100]

Q.3. Find all the weighted Aggregative Price Index for each for the following data –
1) Base Year Current Year
Commodity Price Quantity Price Quantity
p0 q0 p1 q1
I 10 3 20 3
II 40 4 60 9
III 30 1 50 4
IV 60 2 70 2
2) Base Year Current Year
Commodity Price Quantity Price Quantity
p0 q0 p1 q1
A 5 10 8 40
B 3 90 5 40
C 1 30 3 30
D 4 20 6 5
3) Base Year Current Year
Commodity Price Quantity Price Quantity
p0 q0 p1 q1
I 30 3 20 3
II 20 4 10 9
III 40 4 30 1
III 10 0.5 10 2

4) Base Year Current Year

Commodity Price Quantity Price Quantity
p0 q0 p1 Q1
A 50 5 80 5
B 100 4 30 9
C 60 2 10 0.5
D 70 4 90 1
Ans.
L P D-B Fisher M-E Walsch
1) 144.12 149.21 146.665 146.64 147.42 146.67
2) 172.09 172.97 172.53 172.53 172.5 174.29
3) 67.16 60.61 63.89 63.8 63.9 63.33
4) 85.71 61.2 73.46 72.43 72.39 73.33

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

Q.4. Construct the Cost of Living Index Number for each of the following –
1) Base Year Current Year
Group
p0 q0 p1
Food 45 3 50
Clothes 30 5 45
Fuel and Lighting 50 2 60
House Rent 60 3 75
Miscellaneous 20 4 30
2) Base Year Current Year
Group
p0 q0 p1
Food 145 35 150
Clothes 45 20 40
Fuel and Lighting 65 20 75
House Rent 30 15 30
Miscellaneous 23 10 25
3) 2000 2005
Group
p0 q0 p1
Food 50 15 60
Clothes 30 10 30
Fuel and Lighting 20 20 25
House Rent 10 10 15
Miscellaneous 40 30 50
Take Base Year = 2000, Current Year = 2005
4) 1990 1995
Group
p0 q0 p1
Food etc. 120 5 130
Clothes 130 4 200
Fuel and Lighting 140 3 150
House Rent 100 2 110
Miscellaneous 120 6 160
Take Base Year = 1990, Current Year = 1995
5) Base Year Current Year
Group
p0 q0 p1
Food 90 5 200
Clothes 25 4 80
Fuel and Lighting 40 3 50
House Rent 30 1 70
Miscellaneous 50 6 90
6) Base Year Current Year
Group
p0 q0 p1
Food 30 15 25
Clothes 45 10 30
Fuel and Lighting 25 12 20
House Rent 12 8 15
Miscellaneous 36 20 35
[Ans. 1) 130.23; 2) 103.71; 3) 121.82; 4) 125.20; 5) 208; 6) 86.06]

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

Q.5. For the following data, the base year weightage w, and the current year Price Relative I, are
given. Calculate the Cost of Living Index in each case.
1) Group Food Clothes Fuel & Lighting House Rent Miscellaneous
I 150 140 100 120 200
w 4 3 3 4 6

2) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I for 2000 300 180 120 160 200
w for 1900 6 4 5 3 2

3) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 200 150 140 130 180
w 30 40 50 30 50

4) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I (2006) 410 343 285 150 248
w (1996) 45 12 20 15 8

5) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 230 120 120 200 110
w 4 2 6 5 3

6) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 270 240 210 230 100
w 5 3 2 4 1
[Ans. 1) 150; 2) 200; 3) 159.5; 4) 325; 5) 160.5; 6) 234]

Q.6. Find x for each of the following -

1) Group Food Clothes Fuel & Lighting House Rent Miscellaneous
I 300 240 220 x 250
w 6 3 5 4 2
And Cost of Living Index = 246.

2) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 420 320 200 120 250
w 60 40 x 50 20
And Cost of Living Index = 275.

3) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 200 160 180 120 x
w 2 3 4 5 6
Cost of Living Index = 200

4) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 230 210 100 270 240
w 4 2 x 5 3
Cost of Living Index = 234.

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CAF : BUSINESS MATHEMATICS
TOPIC : INDEX NUMBERS

5) Group Food Clothes Fuel & Lighting House Rent Miscellaneous

I 300 240 200 220 250
w 60 30 40 x 20
Cost of Living Index = 246.
[Ans. 1) x = 200; 2) x = 30; 3) x = 300; 4) x = 1; 5) x = 50]

Q.7. The cost of living index number for a class of people in 1975 was 270 with the base 1955. A
person was earning Rs. 500 in the year 1955. What should be his salary in year 1975 if his
standard of living in that year is as same as in 1955? [Ans. ` 1350]

Q.8. The cost of living index number for the years 2010 & 2011 are 150 and 200 respectively. A
person earned Rs. 18,000 per month in the year 2010. What should be his earnings per month
in the year 2011 so has to maintain his former standard of living? [Ans. ` 24,000]

Q.9. If Laspeyre’s index number is 147.12 and Paasche’s index number is 148.71. Calculate
Bowley’s and Fisher’s index number. [Ans. 147.915, 147.91]

Q.10. Find the missing price if Laspeyre’s price index is equal to the Paasche’s price index number
for the following data –
Commodity p0 q0 p1 q1
A 2 5 4 2
B 3 2 - 4
[Ans. x = 6]
Q.11. If P01 (L) = P01 (P), then find x for the following data –
Commodity p0 q0 p1 q1
A 2 5 4 3
B 3 x 5 4
C 1 2 2 2
[Ans. x = 6]
Q.12. If  p0q0 = 150,  p0q1 = 250,  p1q1 = 375 and Laspeyre’s price index number is 140, find
Marshall-Edgeworth’s index number. [Ans. 146.25]

Q.13. The Laspeyre’s and Dorbish-Bowley’s price index numbers are 145.21 and 148.37
respectively. Find the Paasche’s price index number. [Ans. 151.53]

Q.14. If the Dorbish-Bowley’s and Fisher’s price index numbers are equal, show that, the
Laspeyre’s and Paasche’s price index number are also equal.

Q.15. The index number in 2005 increased to 250 when the year 2001 was taken as base.
i) The expenditure of a person in 2001 was Rs. 6,000. What will be his expenditure in 2005?
ii) If his income in 2005 was Rs. 30,000. What should be his income in 2001 so as to
maintain the same standard?
[Ans. i) 15,000; ii) 12,000]