ONE SHOT Index Numbers|MSLR|CAF DEC 2023

Ultimate Marathon Series

ONE SHOT REVISION OF

INDEX NUMBERS

MATH, LR & STATS

CA FOUNDATION DEC 2023

CA. PRANAV POPAT

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

Index Numbers
Past Trends

Attempt Theory Practical Time Series Marks

May 2018 7 2 1 10
Nov 2018 1 2 2 5
Jun 2019 2 2 3 7
Nov 2019 1 1 3 5
Nov 2020 2 1 0 3
Jan 2021 3 0 0 3
Jul 2021 0 4 1 5
Dec 2021 4 1 0 5
Jun 2022 6 0 0 6
Dec 2022 3 2 0 5
Jun 2023 2 3 0 5

Basics of Index Number

• Index numbers are convenient devices for measuring relative changes of

differences from time to time or from place to place.
Definition • Just as the arithmetic mean is used to represent a set of values, an index
number is used to represent a set of values over two or more different
periods or localities.
• WPI : Wholesale Price Index
Practical Examples • CPI : Consumer Price Index
• NIFTY
• An index time series is a list of index numbers for two or more periods of
Index Time Series
time, where each index number employs the same base year
• Relatives are derived because absolute numbers measured in some
Relatives appropriate unit, are often of little importance and meaningless in
themselves.
• because some techniques for making forecasts or inferences about the
figures are applied in terms of index number.
Use of Index • In regression analysis, either the independent or dependent variable or
Numbers both may be in the form of index numbers.
• They are less unwieldy than large numbers and are readily
understandable.
Broad Divisions of • The simple index is computed for one variable whereas the composite is
Index Numbers calculated from two or more variables.

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

Important Issues in Index Creation

• It depends on the purpose for which the index is used.

• Index numbers are often constructed from the sample. Random sampling,
Data Selection and if need be, a stratified random sampling can be used to ensure that
sample is representative.
• Data should be comparable by ensuring consistency in selection method.
• It is a point of reference in comparing various data.
• The period should be normal.
Base Period
• It should be relatively recent because we are more concerned with the
changes with reference to the present and not with the distant past.
• Due consideration should be given to the relative importance of each
Weight Selection
variable which relates to the purpose for which the index is to be used
• Since we have to arrive at a single index number summarising a large
amount of information, it is easy to realise that average plays an
Use of Averages important role in computing index numbers.
• The geometric mean is better in averaging relatives, but for most of the
indices arithmetic mean is used because of its simplicity

Relatives

Pn
• Price Relative =
P0
Qn
Types of Relative • Quantity Relative =
Q0
V PQ
• Value Relative = n = n n
V0 P0 Q 0
P1 P2 P3 P
• , , ,..., n
Link relative P0 P1 P2 Pn−1
• Same can be created for quantities also
• When the above relatives are in respect to a fixed base period these are
also called the chain relatives
Chain relatives P1 P2 P3 P
• , , ,..., n
P0 P0 P0 P0

Simple Aggregative Method

• Price Index is expressed as total of commodity prices in a given year as a

Method
percentage of total of commodity prices in the base year
Pn
Formula  100
P0
Merits • Easy to compute
Demerits • Commodity with higher price will have greater influence in index value

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

• price quotations become the concealed weights which have no logical

significance
• If units of prices are changed, index will also change

Simple Average of Relatives Method

• Under this method, we invert the actual price for each variable into
Method percentage of the base period. These percentages are called relatives.
• The index number is the average of all such relatives.
P
 n
Formula P0
N
• One big advantage of price relatives is that they are pure numbers.
Merits • Price index number computed from relatives will remain the same
regardless of the units by which the prices are quoted

• Inspite of some improvement, the above method has a flaw that it gives
equal importance to each of the relatives (Will not be suitable if the
Demerits commodities do have equal importance in Index)
• This defect can be remedied by the introduction of an appropriate
weighing system

Weighted Aggregative Index Method

• Under this method we weigh the price of each commodity by a suitable

factor often taken as the quantity or value weight sold during the base
General Points year or the given year or an average of some years.
• There are various alternate formulas (depends on base used)
• Here indices are shown as %

Method Name Remark Formula

Laspeyres’ Index Weight – Base Year Quantity PnQ 0
 100
P0 Q 0
Passche’s Index Weight – Current Year Quantity PnQ n
 100
P0 Q n
Marshall-Edgeworth Index Weight – Sum of Base Year Pn (Q 0 + Q n )
 100
Quantity and Current Year Quantity P0 (Q 0 + Q n )
Fisher’s Index GM of Laspeyres’ Index and PnQ 0 PnQ n
Paasce’s Index   100
P0Q 0 P0Q n

Bowley’s Index AM of Laspeyres’ Index and PnQ 0 PnQ n

+
Paasce’s Index P0Q 0 P0Q n
2

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

Weighted Aggregative of Relative Method

• To overcome the disadvantage of a simple average of relative method, we

can use weighted average of relative method
General Points • Generally weighted arithmetic mean is used although the weighted
geometric mean can also be used.
• It is same as Laspeyres’ Index
P
 n  P0 Q 0
Formula P0 P Q
 100 = n 0  100
P0Q 0 P0Q 0

Special Formula to obtain Chain Index Numbers

• The chain index is an unnecessary complication unless of course where

General Points data for the whole period are not available or where commodity basket or
the weights have to be changed.

Link relative of current year  Chain Index of previous year

Formula
100

Other Formulas

Deflated Value = Current Value

Price Index of the current year
Current Value
Deflated Value Deflated Value =
Price Index of the current year
Base Price
Deflated Value (to any period) = Current Value 
Current Price

Shifting Price Original Price Index

Shifted Price Index =  100
Index Price Index of the year on which it has to be shifted

• Here we see, how two index covering different bases may be combined into
single series by splicing
Splicing Two • Splicing two sets of price index numbers covering different periods of time
Index Series is usually required when there is a major change in quantity weights.
• It may also be necessary on account of a new method of calculation or the
inclusion of new commodity in the index

Other Theory Points

Quantity • Though price indices are widely used to measure the economic strength,
Index Quantity indices are used as indicators of the level of output in economy.
Numbers • IIP Index (Index of Industrial Production)

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

• The industrial production index (IPI) measures levels of production and

capacity in the manufacturing, mining, electric, and gas industries, relative
to a base year.
• Value index equals the total sum of the values of a given year divided by the
sum of the values of the base year
Value Index • Formula
Number Vn PnQ n
=
V0 P0Q 0

Limitations of • Chances of errors due to Sampling

Index • It gives broad trend not real picture (as it is based on sample)
Numbers • Due to many methods, at times it creates confusion
• Index numbers are very useful in deflating (eg. Nominal wages into real)
Usefulness of • Framing suitable policies in economics and business
Index • They reveal trends and tendencies in making important conclusions
Numbers • They are used in time series analysis to study long-term trend, seasonal
variations and cyclical developments
• CLI is defined as the weighted AM of index numbers of few groups of basic
Cost of Living
necessities.
Index
• Generally for calculating CLI; food, clothing, house rent, fuel & lightning and
(General
miscellaneous groups are taken into consideration.
Index)
• Examples of CLI: WPI, CPI, etc.

Test of Adequacy

• This test requires that the formula should be independent of the unit in
which or for which prices and quantities are quoted.
Unit Test
• Except for the simple (unweighted) aggregative index all other formulae
satisfy this test.
• It is a test to determine whether a given method will work both ways in
time, forward and backward.
• The test provides that the formula for calculating the index number should
be such that two ratios, the current on the base and the base on the current
Time Reversal should multiply into unity.
Test • In other words, the two indices should be reciprocals of each other.
P01 P10 = 1
• Laspeyres’ method and Paasche’s method do not satisfy this test, but
Fisher’s Ideal Formula does.
• This holds when the product of price index and the quantity index should be
equal to the corresponding value index.
Factor • Symbolically
Reversal Test
P01  Q 01 = V01
• Only Fisher’s Index satisfies Factor Reversal test

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

• Fisher’s Index Number is ideal as it satisfies Unit, Time Reversal and Factor
Reversal Test
• It is concerned with the measurement of price changes over a period of
years, when it is desirable to shift the base
• This property therefore enables us to adjust the index values from period to
period without referring each time to the original base. The test of this
Circular Test
shiftability of base is called the circular test.
• This test is not met by Laspeyres, or Paasche’s or the Fisher’s ideal index.
• The simple geometric mean of price relatives and the weighted
aggregative with fixed weights meet this test.

If the 1970 index with base 1965 is 200 and 1965 index with base 1960 is 150,
PYQ May 18 what will be the index of 1970 on base 1960?
a. 700 b. 300 c. 500 d. 600
Ans: b

If Laspeyre’s Index Number is 250 and Paasche’s Index Number is 160, then
PYQ Nov 18 Fisher’s Index number is
a. 40,000 b. 25/16 c. 200 d. 16/25
Ans: c

The prices and quantities of 3 commodities in base and current years are as
follows:
P0 P1 Q 0 Q1
12 14 10 20
PYQ Jun 19
10 8 20 30
8 10 30 10
The Laspeyre’s’ price index is
a. 118.13 b. 107.14 c. 120.10 d. None
Ans: b

The cost-of-living index numbers in years 2015 and 2018 were 97.5 and 115
respectively. The salary of a worker in 2015 was ₹ 19500. How much additional
PYQ Jun 19 salary was required for him in 2018 to maintain the same standard of living as in
2015?
a. 3000 b. 4000 c. 3500 d. 4500
Ans: c

The index number of prices at place in the year 2008 is 225 with 2004 as the base
PYQ Nov 19 then there is _____ increase
a. 125% b. 225% c. 110% d. 25%
Ans: a

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

The weighted aggregative price index turnover for 2001 with 2000 as the base
year using Paasche’s Index Number is:
Price Quantity
Commodity
2000 2001 2000 2001
PYQ Jul 21 A 10 12 20 22
B 8 8 16 18
C 5 6 10 11
D 4 4 7 8
a. 112.32 b. 112.38 c. 112.26 d. 112.20
Ans: d

The weighted aggregative price index turnover for 2001 with 2000 as the base
year using Marshall Edgeworth Index Number is:
Price Quantity
Commodity
2000 2001 2000 2001
PYQ Jul 21 A 10 12 20 22
B 8 8 16 18
C 5 6 10 11
D 4 4 7 8
a. 112.32 b. 112.38 c. 112.26 d. 112.20
Ans: c

The consumer price index goes up from 120 to 180 when salary goes up from 240
PYQ Jul 21 to 540, what is the increase in real terms?
a. 80 b. 150 c. 100 d. 240
Ans: c

During the certain period the C.L.I. goes up from 110 to 200 and the Salary of a
worker is also raised from 330 to 500, then the real terms is
MTP Nov 20
a. Loss by ₹ b. Loss by ₹ c. Loss by ₹
d. None
50 75 90
Ans: a

From the following data for the 5 groups combined

Group Weights Index Number
Food 35 425
Cloth 15 235
MTP Oct 21 Power and Fuel 20 215
Rent and Rates 8 115
Miscellaneous 22 150
The general index number is
a. 270 b. 269.2 c. 268.5 d. 272.5
Ans: b

The consumer price Index for April 1985 was 125. The food price index was 120
and other items index was 135. The percentage of food out of the total weight of
MTP Oct 21
the index is
a. 66.67 b. 68.28 c. 90.25 d. None
Ans: a

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 ONE SHOT Index Numbers|MSLR|CAF DEC 2023

The index number for the year 2012 taking 2011 as the base year from the data
given below by using simple average of price relative method is
Commodity A B C D E
MTP Mar 22
Price in 2011 115 108 95 85 90
Price in 2012 125 117 108 95 95
a. 112 b. 117 c. 120 d. 111
Ans: d

The simple index number for the current year using simple aggressive method for
the following data:
Commodity Base Base Year Price Current Year Price
Wheat 80 100
MTP Jun 22
Rice 100 150
Gram 120 250
Pulses 200 300
a. 200 b. 150 c. 240 d. 160
Ans: d

In the data group, Bowley’s and Laspeyre’s index number is as follows. Bowley’s
MTP Dec 22 index number is 150, Laspeyre’s index number is 180 then Paasche’s index number
Series 1 is
a. 120 b. 30 c. 165 d. None
Ans: a

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