The value of a single commodity is the product of its price and quantity . Thus a Value Index V is the sum of the value of a given year divided by the sum of the value of the base year. 2piq Ve Sma vhere Lpiqi = Total value of all commodities in the given period, and pogo = Total value of all commodities in the base period. Since in most cases the value figures are given the formula can be stated nore simply x 100, V = Value index‘esull obtained by applying the Laspeyres method would come ained by weighted arithmetic mean of price relatives method as shown below PRICE INDEX BY LASPEYRES METHOD pe a Pia m is. 30 20 kg. Rs. Rs. 1.5 40 kg Rs. 4 Re. 1.0 10 It Rs. 1 i fan = 22!® 100 - 189, 100-1903 Spoq * 100 = 139 * 100 = 12 amo as that obtained by weighted arithmet " e the weighted average of price relative method can a nod (given by Laspey 8) as follows) INDEX NUMBER USING GEOMETRIC MEAN OF PRICE RELATIVES [at ® a As.30 20kg. Rs. 40 Rs.15 40kg, AS. 16 Re 10 10 As. 15 EViogp}_ Por = Antiog | = AntiloglNustration 8 i pce'method using From the following data compute price index by supplying weighted 'D) geomeinc mean Commodity po (Rs) a mr Sugar 30 20 kg. Flour 15 40 kg. ak 10 10 Solution. (a) INDEX NUMBER USING WEIGHTED ARITHMETIC MEAN OF PRICE RELATIVES Sugar As. 30 20Kg As. 40 60 aman 8.000 Flour As.15 40kg. A816 60 18. 100 6.4 it Re 10 108 ABT 10 18 . 100 1.500 Ev = 130 This means that there hes beenat.S.pescentinessasednpsesaaussthe base \sIf instead of using arithmetic mean the geometric mean may be used for assigning relatives. y 5 Po, = Antilog | LY. jose p= 21x 100 at *V= Value weight, ie.. poqo for each item —_ aeOe lead In the weighted aggregative method discussed above price relatives were not computed . However like Unweighted relative method it is also possible to compute weighted average of relative . For purpose of averaging we may use either the arithmetic mean or the_geometric mean. yer iv’ *V = Value Weights, Le.. Podo Po. = where P = Price Relative A price relative is the ratio of the price of a single commoaity in a given period to its price in another period called the base period or reference period. If po and pn denote the commodity price during the base period and given period respectively, then by definition: price relative = Pr/ Po adding generally expressed as percentage by multiplying by 100.11878 « 100 = 1256 x 100 = 1266 +a Song + Son 5. Marshall-Edgeworth Method : Ps D+ Pr , 199 = LD PrP Liq sq Song + Sond 200 130 $30 100 « 12547 10 160+ 109" "263Ithustration 6. ~c nats the following data by applyingWeighted Aggregative Indices () Laspeyre’s Index Z = pido Po. = 100 = Podo ro) sche's Index Po. = = 2i2 x 100 = pod 1) Bowley’s Index )E ae Por es < Uv) Fisher's Ideal Index ro =V ») Marshall-Edgeworth’s Index =P (qo+ @ ,. 100 = Po (do + 4) x ZPid x 100 ¥ pod Por (v0 Kelly's Index =P18 x 100> Po, = Tout x 100; where q= orn > annL(got+ dQ) Pr 100 ‘=F (Go+ 1) Po = aPY This of following reasons: 1) It is based on the geometric_mean which is theoretically considered to be the best average for constructing index number. 2) It takes into account both current year as well as base year prices and quantities. 3) It satisfies both the time reversal test as well as factor reversal test. vhen Por x Qor = SP Pogo ce POF Time reversal test is satisied when Pox Pio= 1(iv) Fisher's ‘Ideal’ Index. Prof. Irving Fisher has given a number of formulae for constructing index number and of these he calls one as the ‘ideal’ index. The Fisher's Ideal Index is given by the formula ¥ y xP Poy = Vo x 2PM 100 oF Por = VLxP Ypoqo 2p041 Fisher’s Ideal Index is the geometric mean of the Laspeyres & Paasche indices. ™ eei) Dorbish and Bowley’s Method. Dorbish and Bowley have suggested simple arithmetic mean of the two indices (Laspeyres and Paasche) mentioned above so as to take into account the influence of both the periods, ie., current as well as base periods. The formula for constructing the index is Orthe difficulty in computing the Passche index in practice is that revised weights or quantities , must be computed each year or each period, adding to the data collection expense in the preparation of the index . For this reason , the Paasche Index is not used frequently in practice where the number of Sirmesisic s large.(i) Paasche's Method* The Paasche price index is a weighted aggregay, price index in which the weights are determined by quantities in th. given year. The formula for constructing the index is : y Poy =e x 100 2 Pod eSLaspeyres index attempts to answer the question: “ What is the change in aggregate value of the base period list of goods when valued at_given period price? The Laspeyres Index has an upward bias. When price increase , there is tendency to reduce th onsumption_of higher priced items. Hence by using base year weights , to much weights will be given to those items which have increased in price the most. Similarily when price decline , consumer shift: their purchases to those items which decline the most . So it overstate the index.arEaspeyres Method. The Laspeyers Price Index is a weighted aggregate yrice index, where the weights are determind by quantities in the base riod. The formula for constructing the index is x pido Por x 100 i Eppqo Steps + Muluply the current year prices of various commodities with base d obtain Epiqo- far prices of various commodities with base year year weights a + Multiply the base ye weights and obtain Ypoqo BI; Divide Zpiqo by Epoq and multiply the quotient by 100. This gives Bi the price index eeWeighted Aggregative Indices These indices are of the simple aggrega tive type with the fundamental difference that weights are assigned to the rious items included in various methods of assigning weights and con sequently a large number of formulae for constructing index numbers have been devised of which some of the more important ones are: [+ Laspeyres method + Paasche method | + Dorbish and Bowley’s method + Fisher's ideal method | + Marshall-Edgeworth method, and + Kelly's method. aUnweighted Index _Number.-They “assign equal importance to all the items included in the index. Weighted Index Number- Conscious effort to assign to each commodity a weight in accordance with its importance in the total phenomenon that the index is SUppOsesiio describe.Meaning -Features Uses -Classification Methods i ructing Inc Unweighted Index Number Weighted Index Number L r Aethor Nu (M & L) Value IndexExtreme _items_do not influence the index. Equal importance is given to all the items. The index is not influenced by the units in which prices are quoted or by the absolute level of individual price . Relatives are pure numbers and are, therefore divorsed from original units. (-)Difficulty is faced with regard to the selection of an appropriate average. The use of the arithmetic mean is considered as questionable sometimes because it has an rd_ bias. The use of geometric mean_ involves ies of computation. Other average are almost never dex numbeINDEX NUMBERS USING GEOMETRIC MEAN OF PRICE RELATIVES ) modity Price in Price in Price Log P 2002 20083 Relatives P A P A 50 70 1400 aes 8 40 60 2.1761 80 90 2.0512 0 110 120 20378 E 20 20 2.0000 DiogP = 10.4112 Antiog| 2222] -anog| 124242] anton 20822 = 1208 cus anthmatic mean and geome mean have both been used, the athmotic mean is Aniough arithmetic mean are er fo compute and much better known. Some economists proered because praered to uao tho modan whichis not afleced by extreme ably Edgeworth rae Pporant ony when an index based ona very smal number of mod ‘arry much weight and the median is seldom used in actual generally does not cItustration 3. averaged oIatves From the following data, construct fan index for 2003 taking 2002 as base by the average of relatives method using (a) arithmetic moan Price in 2002 (Fis), snd-{b}-goornetsic_rmean fOr xo in 2003 (Rs. ” 2 ware 3 | 2 2 é 20 $0 5 v0 120 é 20 20 Solution. (a) INDEX NUMBERS USING ARITHMETIC MEAN OF PRICE RELATIVES commodity Price in 2002 (Rs) Price in 2003 (Ris) Price relatives Pe * 00 : : oa A wat 76 1400. 3 soc CO i500 \ 80. 90.) 125 | FA] 0 J 20 1000lustration 3. by the average of a ‘50 8 40 c 20 o 10 E 20 Solution ‘ommodity Price in 2002 (Rs.) Po a 30 8 40 From the following data, construct Price in 2002 90 fan index for 2003 taking 2002 as base Tolatives method using (a)-arithmetic moan, ‘and (0) geometric mean for Price in 2003 (Rs. 70 60 20 2) INDEX NUMBERS USING ARITHMETIC MEAN OF PRICE RELATIVES Price in 2003 (Rs) Price relatives F100 70.0 100.0fe log — x 100 Po s 2 log P antild - = antilog antilo; 7 antilog —_ ae2. Simple Average of Price Relatives Method When this method is aced te construct a price index, first of all price relatives are obtained for the various items included in the index and then average of these relatives {8 obtained using any one of the measures of central value, Le. arithmete mean, median, mode, or harmonic mean. When irithmetic mean is used for averaging the relatives, the formula for com. puting the index Py \Po x 100] Po = rs where N refers to the number of items (commodities) whose price relatives are thus averaged A price relative is the ratio of the price of a single commoany in a given period to its price in another period called the base period or reference period. If po and pn denote the commodity price during the base period and given period respectively, then by definition: price relative = Pr/ Po adding generally expressed as percentage by multiplying by 100. SaiineEEEEenenneThe units used in the price or quantity quotations can exert a big influence on the value of the index.( Kg/Pound/Per quintal). No consideration is given to the relative importance of the commodities. This index is based on the assumption that the various terms and their prices are quoted in the Wysame unit.iMustration 1. From the following data construct an index for 2003 taking 2002 a8 base Commodity Price in 2002 (Rs.) Price in 2009.) A 0 60 8 oo 90 c oo 120 D 110 ry € 20 Solution. CONSTRUCTION OF PRICE INDEX Commodity Price in 2002 Price in 2003 _ B A x 50 70 8 40 60 c 80 90 ° 110 120 E 20 20 EP = 300 Pr = 360 260 Por = BEL x 100 = 282 « 100 = 120 conti eased, Be Passing asa ata. & Mat erence nt pone1. Simple Aggregative Method This is the simplest method of con structing index numbers. When this method is used to construct a price index, the total of current year prices for the various commodities in estion is divided by the total of base year prices and the quotient ts multiplied by 100. Symbolically rp, rrr x 100 EP; = total of current year prices for various commodities E Po = total of base year prices for various commodities. This method of constructing the index is the simplest of all the methods. The steps required in computation ) Add the current year prices for v. (i) Add the base year prices for the same commodities, Le., obtain ¥ Pp i) Divide E P; by ¥ Po and multiply the quotient by 100. Oe ee ene rious commodities, Le., obtain 5 PyTndex Numbers Weighted (p Weighted In the unweighted indices weights are not_expressly assigned whereas in the weighted indices we weights*are mssigned to the various itemIndex Numbers Weighted Weighted Ave Relatives In the unweighted indices weights are not expressly assigned whereas in the weighted indices weights are mssigned to the various item_ Classification Of Index Numbe In term of What They Measure- ( Price >) ( Quantity ) Value /~ Special > \— Purpose _/They help in framing suitable policies. They reveal trends and tendencies . They are important in forecasting future economic activity. eeIndex Number are specialized average. Index numbers measures the Net Change in a group of related variables.(Ex- Sensex(30) & Nifty(S0)) Index number measures the Effect of change over a period of time. = aetfidex number are devices for measuring difference in the magnitude of a group of related variables. aS An Index number is a statistical measure designed to show changes in a_variable or a group of related variable with respect to time, geographic or other location or other characteristic such as income, profession etc. Ex Petrol Price An Index number is nothing more than a relative number. or a ‘relative’ which expresses the relationship between two figures where one of the figure is used as a base. An index number is a Specialized average designed to measure the change in a group of related variable over a period of time. Ex- When we say that the index number of wholesale prices is 112 for january 2005 compared to january 2004, it means there is net increase ice of wholesale commodity to the extent of 12 % during the yearMost widely used statistical devices and there is hardly any field where they are not used Newspapers headline the fact that price are going up/ down that industrial production __is__rising/falling , that imports/Exports are _increasing/decreasing, that crime are sina falling in a particular period compared to the previous period as disclosed by index number. They are described as ‘Barometer of Economic Activity’i.e if one wants to get.an idea as to what is happening to an economy. He should look to important indices like the index number of industrial roduction , agricultural production , business ae Mar! Ket Indexteensex & Nitty Etc.Meaning Features , Uses Classification Unweighted Index Number Weighted Index Number Numerical. (M & L) verage Of Relative Value index(Part#1) a