Economics: Introduction to index numbers

PRESENTED BY-Poonam DuaAmend Education Academywww.amendeducation.com

Topic Introducation• An index number is an economic data figure

reflecting price or quantity compared with a standard or base value. The base usually equals 100 and the index number is usually expressed as 100 times the ratio to the base value..

• A simple index number is the ratio of two values representing the same variable, measured in two different situations or in two different periods. For example, a simple index number of price will give the relative variation of the price between the current period and a reference period.

Some More information about INDEX NUMBER

•Economists frequently use index numbers when making comparisons over time. An index starts in a given year, the base year, at an index number of 100. ... An index number of 102 means a 2% rise from the base year, and an index number of 98 means a 2% fall.

Example

Index Numbers have the following features

•(i) Index numbers are specialised averages which are capable of being expressed in percentage.

•(ii) Index numbers measure the changes in the level of a given phenomenon.

•(iii) Index numbers measure the effect of changes over a period of time

•1. Index number helps in measuring relative changes in a set of items.

•2. Index numbers provide a good basis of comparison because they are expressed in abstract unit distinct from the unit of element.

•3. Index numbers help in framing suitable policies for business and economic activities"

Index Numbers are indispensable tools of economic and business analysis. Their significance can be appreciated by following points :

PROBLEMS RELATED TO INDEX NUMBERS

WAYS OF CONSTRUCTING INDEX NUMBERS

SIMPLE AGGREGATIVE METHOD

• Simple AggregativeUnder this method, the price index for a given period is obtained by dividing the aggregate of different prices of the current year by the aggregate of different prices of the base year, and multiplying the quotient by 100. As such, the price index, under this method, is computed by the formula,

• P01 = ( ∑P1/∑P0 ) X 100 • Where, P01 = Price index of the current year

with reference to the base year• ∑P1 = total of the prices of the current year• ∑P0  = total of the prices of the base year.

Weighted average of price relativeThe Weighted Average of Relatives Price Index. ... As

the term suggests, in 'a weighted average of relatives computation, each relative is multiplied by its weight, the products are added, and then the sum of the products is divided by the sum of the weights. Weighted arithmetic mean of price relative-

VPV

P01

1000

1 PPPWhere-

P=Price relativeV=Value weights=

00qp

Weighted average of price relative

Value index numbers

A chain index is an index number in which the value of any given period is related to the value of its immediately preceding period (resulting in an index for the given period expressed against the preceding period = 100); this is distinct from the fixed-base index, where the value of every period in a time series is directly related to the same value of one fixed base period. Calculate Chain Index Number for the following