Indices Chapter 09

Index Numbers: Index numbers are measure that designed to show changes in a variable or group
of related variables with respect to time e.g. income, inflation etc.
1) Simple Index Number: It measure percentage change in single variable with respect to a base.
2) Composite Index Number: It measures an average percentage change in a group of relative
variables with respect to a base.
i) Price Index Numbers: It measures the relative changes in the price of commodity between two time
periods.
ii) Quantity Index Numbers: It measures relative changes in the physical quantity of good produced,
consumed or sold for an item or group of items.
1) Simple Price Index or Price Relative:
Methods to Measure Physical Quantities:
i) Fix Base Method:

Years Price
2018 30
2019 45
2020 55
2021 100

Chain Base Method:




Example: Find price index using chain base method

Years Price
20x5 100
20x6 110
20x7 120
20x8 130

20x9 160

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2) Composite Price Index:

Composite
Index

Un-weighted Index Weighted Index

Simple Aggregate Simple Average Laspeyre’s

Paasche’s

Fisher’s

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Finding Index By Simple Aggregate Method:

∑
∑

Years Price of A Price of B Price of C

2020(Base) 10 5 6
2021 10 6 12

Finding Index by Simple Average Method:

∑( )

Years Price of A Price of B Price of C

2020(Base) 10 5 6
2021 10 6 12
(N=3)

Note: Convert to and to if quantity index is required.

Weighted Price Index:

Laspeyre’s Index:
 It is based on base year
∑

∑
∑

∑
 It is also called based year weighted index
 Only price information is required in current year
 Overstate inflation

Paasche’s Index:
 It is based on current year
∑

∑
∑

∑
 It is also called current year weighted index
 Price and quantity each information is required in current year.
 Understates Inflation

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 Indices Chapter 09

Fisher’s Index:

 √
 √
Example: Goods
A 5 7 10 15
B 10 15 5 8
C 6 10 20 15

(156.8%, 111.36%) (153.06%, 108.69%) (154.91%, 110.01%)

Weighted Average of Price:

∑
∑


Substituting the values in above formula we will get the result that is:
∑
∑
Example:
Goods Prices W

2021 2022

A 4 9 10

B 6 11 15

C 10 9 15

Consumer Price Index:(CPI)

 It is also called retail price index or cost of living index
 It is a composite price index calculated using any of the following method
Aggregate Expenditure method:
∑
∑
Household or Family Budget Method:
∑
∑

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 Indices Chapter 09

Purchasing
Price CPI
Power

Formulae to Remember:


 Purchasing Power =

 Real Income = Income x P.P
 P.P =

 C.P.1 =
Example:
Real Income of a person in 2012 was 24000 with CPI of 105. If CPI in 2013 is 120 find his real
income in 2013.
Example:
Find Purchasing power in each year.

Year CPI
2021 100
2022 105
2023 112
2024 120

Example: Calculate Real Income in each case

Years Income CPI Real Income Status

2020 15000 100 15000/100=15000 Equilibrium

2021 17000 98 17000/98=17346.7 Surplus

2022 20000 106 20000/106=18868 Deficit

2023 26000 122 26000/122=21311 Deficit

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Example: If the current year weighted index is 5% higher than the base year weighted index. Fischer’s
index is 250. Find Laspeyre’s and Paasche’s price index.
(243.975, 256.1)

Example: If Fischer’s index is 10% more than the Laspeyre’s index. If base year weighted index is
109.5. Find Paasche’s index.
(132.49)
Rate of Inflation/Deflation:

Inflation
Positive Value

Deflation
Negative Value

Example: Find Rate of Inflation or Deflation of each of the following years.

Year CPI
20x5 100
20x6 95
20x7 120
20x8 130
20x9 97
Quick facts:



 If GDP Deflator is 115% , It means 15% is Inflation rate.
 GDP is deflator is the broader measure of inflation than CPI.

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