Professional Documents
Culture Documents
Contents
Base shifting
Introduction
Splicing
Definition
Deflating
Characteristics
CPI : Uses, Problems,
Uses
cons. methods
Problems
Classification
Methods
Value index numbers
Chain index numbers.
INTRODUCTION
An index number measures the
relative change in price, quantity,
value, or some other item of interest
from one time period to another.
A simple index number measures the
relative change in one or more
than one variable.
WHAT IS AN INDEX
NUMBER
DEFINITION
Index
numbers
are
quantitative
measures of growth of prices, production,
inventory and other quantities of
economic interest.
-Ronold
CHARACTERISTICS OF INDEX
NUMBERS
Index numbers are specialised
averages.
Index numbers measure the change
in the level of a phenomenon.
Index numbers measure the effect of
changes over a period of time.
USES OF INDEX
NUMBERS
o They reveal trends and tendencies.
o To framing suitable policies.
o Index numbers are very useful in
deflating value of concerned
variable.
CLASSIFICATION OF INDEX
NUMBERS
METHODS OF CONSTRUCTING
INDEX NUMBERS
SIMPLE AGGREGATIVE
METHOD
It consists in expressing the aggregate price
of all commodities in the current year as a
percentage of the aggregate price in the
base year.
P01
100
UNITS
PRICE (Rs)
2007
Sugar
Quintal
2200
3200
Milk
Quintal
18
20
Oil
Litre
68
71
Wheat
Quintal
900
1000
Clothing
Meter
50
60
PRICE (Rs)
2008
Solution:COMMODITIES
UNITS
PRICE (Rs)
2007
Sugar
Quintal
2200
3200
Milk
Quintal
18
20
Oil
Litre
68
71
Wheat
Quintal
900
1000
Clothing
Meter
50
60
3236
PRICE (Rs)
2008
4351
P01
1
0
100
4351
100 134.45
3236
It means the prices in 2008 were 34.45% higher than the previous year.
p 100
P01 0
N
Where N is Numbers Of items.
When geometric mean is used-
p1
log p 100
0
log P01
N
Example
From the data given below
construct the index number for
the year 2008 taking 2007 as
base
year. Price (2007)
Commodities
Price (2008)
P
10
12
10
12
12
Solution-
Price (2007)
p0
Price (2008)
p1
Price
p1
Relative
100
p0
10
166.7
12
16.67
150.0
10
12
120.0
12
150.0
p1
=603.37
100
p
0
p1
p 100 603.37
0
P01
120.63
N
5
Laspeyres method.
Paasche method.
Fishers ideal method.
Dorbish and bowleys method
Marshall-Edgeworth method.
Kellys method.
p01
pq
p q
1 0
100
0 0
Paasches Method.
This method was devised by a German statistician Paasche
in 1874. The weights of current year are used as base year
in constructing the Paasches Index number.
p01
pq
p q
1 1
0 1
100
p01
pq pq
p q p q
1 0
1 1
0 0
0 1
100
P01
p q p q 100
pq pq
1
Marshall-Edgeworth Method.
In this index the numerator consists of an aggregate of the
current years price multiplied by the weights of both the
base year as well as the current year.
p01
p q p q
p q p q
1 0
1 1
0 0
0 1
100
Kellys Method.
Kelly thinks that a ratio of aggregates with selected weights (not
necessarily of base year or current year) gives the base index number.
p01
pq
100
p q
1
2007
ITEMS
PRICE
PRODUCTION
PRICE
PRODUCTION
Wheat
15
500
20
600
Rice
18
590
23
640
Maize
22
450
24
500
SolutionITEMS
PRICE
p0
PRODUC
TION
PRICE
q0
p1
PRODU
CTION
q1
p1q0 p0 q0 p q p0 q1
1 1
Wheat
15
500
20
600
10000
Rice
18
590
23
640
Maize
22
450
24
500
10800
TOTAL
7500
9900
12000
9000
12000 11000
Solution1.Laspeyres index:
p1q0
34370
p01
100
100 122.66
28020
p0 q0
2. Paasches Index :
p01
pq
p q
38720
100
100 122.84
31520
1
1 1
0
p q p q 100
pq pq
1
34370 38720
100 122.69
28020 31520
Where- P P1 100
P
Weighted
arithmetic
mean
of
01
V
P
0
price relativeP=Price relative
V=Value weights=
p0 q0
V
pq
1
100
What is the index of value for May 2005 using May 2000 as the base period?
26
27
60
2008
65
solutionYEAR
PRICE
LINK
RELATIVE
CHAIN INDEX
(BASE 2006)
2006
50
100
100
2007
60
60
100 120
50
120 100
120
100
2008
65
65
100 108
60
108 120
129.60
100
Base shifting
When previous year become too old and useless
for the purpose of comparisons
When comparison is to be made with another
series of index number having different base
Method
Base shifting
Deflation
Used to calculate real value of monetary
variable so as to remove the impact of
inflation of deflation based on index
numbers.
Deflation
Splicing
Problem of combining two or more
overlapping series of index numbers
into one continuous series
Example
Example
Tests of consistency
Time reversal
test
P01 x P10 = 1
Tests of consistency
Time reversal
test
P01 x P10 = 1
Tests of consistency
Time reversal
test
P01 x P10 = 1
Factor
reversal test
Tests of consistency
Time reversal
test
P01 x P10 = 1
Factor
reversal test
Tests of consistency
Time reversal test
P01 x P10 = 1
Factor reversal
test
Circular reversal
test
P01 x P12 x P20 =
1
Tests of consistency
Time reversal test
P01 x P10 = 1
Factor reversal
test
Circular reversal
test
P01 x P12 x P20 =
1
CPI Uses
It allows consumers to determine the
effect of price increases on their
purchasing power.
It is a yardstick for revising wages,
pensions, alimony payments, etc.
It is an economic indicator of the rate of
inflation in India.
It computes real income: real income =
money income/CPI X (100)
46
47
Methods of Construction of
Index Number
1. Aggregate Expenditure
Method/aggregative methods
Commonly Laspreys method is used under this
Thanks