Index Numbers Flashcards
Definition of an index number
An index number is a specialised average designed to measure the relative change in the values of a variable or group of related variables with reference to change in time or location
What are the steps involved in the construction of an index number
Purpose and scope of index number Selection of items Collection of data Selection of this period Selection of an average Selection of appropriate weight
What are the types of index numbers
Simple index
Composite index
What is simple index
If an index is based on a single variable only then it is known as simple index
What is composite index
An index number based on more than one variable is called a composite index
Examples of simple index numbers
Index number of average quality of wheat rice
Index number of carpets exported to the middle east
Index number of ghee prices
Examples of composite index numbers
Index number of Pakistan’s exports
Index number of industrial production
Simple index numbers methods
Fixed base method
Chain base method
Composite index numbers types
Unweighted index numbers and weighted index numbers
Weighted index numbers
Weighted aggregative
Weighted average of relatives
Weighted aggregative
Laspeyre’s method
Paasche’s method
Fisher’s method
Weighted average of relatives
When weights are given
Laspeyre’s method
Paasche’s method
UnWeighted index numbers
Simple aggregative method
Simple average of relative’s method
Simple aggregative method
Fixed base method
Simple average of relatives method
Fixed base method
Chain base method
How do we obtain a simple index number
Simple index number is also known as simple relative and is obtained by dividing the current year price or quantity or value by the base year price or quantity or value and expressing the result in percentage
Formula for finding price relative
Pi/Po x 💯
PI is price of current year
PO is the price of base year
How do we find the link relative
Link relative can be found by dividing current period price or quantity or value with the price, quantity or a value of immediate previous year and expressing the ratio in percentage
Formula for finding link relative
Price of current year/Price of previous year x 💯
How do we find chain indices
Previous year chain indice multiplied by current year link relative divided by hundred
What is the difference between fixed base method and chain base method
In fixed base method, the year or period of years to which all the prices are related is constant for all times. While in chain base method, the prices of a year are divided by the immediate previous year.
How can we select the base period
The period with which we like to compare the relative changes is known as reference period or base period. The index for base period is always taken as 💯 .
The base period should be normal
Should not be too distant
Fixed base or chain base
Which mean is considered to be the best average
Geo metric mean
Simple aggregate method fixed base method formula
Under the price index the total of current year prices are divided by base year prices and expressed in percentage
€Pn/€Po x 💯
Simple average of relatives method fixed base method formula
1) price relative of each item
2) average by mean or median
Simple average of relative chain base method
1) link relative
2) average of link relative
3) chain indices of average
What is weighted index number
The index number computed considering relative importance of every item involved in the index number is called weighted index number
What is unweighted index number
Index number computed considering equal importance of every item involved in the index number is called unweighted index number
Laspeyre’s method
Base year quantity is used as weight for price index and base year price is used as weight for quantity index
Laspeyre formula
€PnQo/€PoQo x 💯
Paasche’s method
Current year price is used as weights for quantity index and current year quantities are used as weights for price index
Paasche’s formula
€PnQn/€PoQn x 💯
Fisher’s method
Geometric mean of Laspeyre’s and Paasche’s indices
Fisher’s formula
Square root of Laspeyre and Paasche
Weighted average of relatives when weights are given method formula
Ip=Pn/Po x 💯
€IpW/€W
Laspeyres method weighted average of relatives method
€(Pn/Po)(PoQo)/€PoQo x 💯
Paasches method weighted average of relatives method formula
€(Pn/Po)(PoQn)/€(PoQn) x 💯
What is
SPI
CPI
WPI
Sensitive price indicator
Consumer price index
Wholesale price index
