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CHAPTER 7
INDEX NUMBERS
Index number is a specialized average calculated for the purpose of
measuring change in the item for which index number is calculated. With the
help of Index Numbers one can identify the increase or decrease in general price,
cost, population, sales, import, export, agricultural production, industrial
production etc., over a period of time.
According to Spiegel ‘an Index Number is a statistical measure designed
to show changes in a variable or a group of related variables with respect to time,
geographic location or other characteristics such as income, profession etc.’
Index numbers are said to be a specialized averages because usually for
calculating average value all data must be in same unit of measurement. This is
not a condition in case of Index Number. For calculating consumer price index,
the items of products chosen may be measured in different units of
measurement. Rice, wheat and sugar are measured in Kilograms, oil, milk, water
are measured in liters, clothes in meters and so on. But index number is
calculated taking all these items into consideration. So, it is a specialized
average.
Index numbers are acting as the barometers of describing economic
activity of a country. They aid Governments in framing suitable policies and for
forecasting future economic activity
price of current year
Price Index Number =
Price of base year
Qty of current year
Quantity Index Number =
Qty of base year
Symbolically they are,
P1
Price index = 𝑥 100
P0
Q1
Qty Index = 𝑥 100
Q0
P1Q1
Value Index = 𝑥 100
P0Q0
2
The above are simple price index numbers which are calculated for a given
single product. If the data are given for list of products then the index number is
said aggregate price index and it is calculated by the following formula:
∑P1
Price index = 𝑥 100
∑P0
∑Q1
Qty Index = 𝑥 100
∑Q0
In case of weighted aggregate price index, each data is weighted according
to its importance which is usually quantity of usage and these are calculated by
the following different methods.
Methods of calculating Index Number:
∑𝐏𝟏𝐪𝟎
1. Laspeyre’s Method 𝒙 𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟎
∑𝐏𝟏𝐪𝟏
2. Paasche’s Method 𝐱 𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟏
𝑳+𝑷
3. Dorbish & Bowley (L is Laspeyer’s and P is Paasche’s)
𝟐
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
+
∑𝐏𝟎𝐪𝟎 ∑𝐏𝟎𝐪𝟏
i.e. ________________
2
4. Fishers’s Ideal Index Number
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
= √∑𝐏𝟎𝐪𝟎 𝒙 x 100
∑𝐏𝟎𝐪𝟏
i.e. √𝑳 𝒙 𝑷 (L is Laspeyer’s and P is Paasche’s)
5. Marshal Edgeworth Index Number:
∑𝒑𝟏(𝒒𝟏+𝒒𝟎)
𝒙 100 Or
∑𝒑𝟎(𝒒𝟏+𝒒𝟎
∑𝐏𝟎𝐪𝟎 + ∑𝐏𝟏𝐪𝟏
𝑿 𝟏𝟎𝟎
∑𝐏𝟎𝐪𝟎 + ∑𝐏𝟎𝐪𝟏
6. Kelly’s Method
3
∑𝑷𝟏𝒒
= 𝒙 100
∑𝒑𝟎𝒒
𝒒𝟏+𝒒𝟎
Where, q = 𝟐
Weighted Index Number
∑𝒑𝟏𝒘𝟏
W.I.N. = *100
∑𝒑𝟎𝒘𝟎
1. Calculate the various IN’s for the following.
Price Price Qty
2013 2012 2013 2012
15 13 50 40
20 18 65 55
19 21 70 65
12 18 80 70
16 15 90 80
P 0q P1 q p0 p1 q1 q0 p1q0 p1q1 p0q0 p0q1
585 675 13 15 50 40 750 600 650 520
1080 1200 18 20 65 55 1300 1100 1170 990
1417 1282 21 19 70 65 1330 1235 1470 1365
1350 900 18 12 80 70 960 840 1440 1260
1275 1360 15 16 90 80 1440 1280 1350 1200
______ ______ ______ ____ ______ ______ _______ _____
57075 54175 355 310 5780
5055 6080 5335
5780
1 . Laspeye’s IN = *100 { 5% price decrease in 2013
6080
Compared to 2012}
= 95.07%
5055
2 . Paasche’s IN = 5335
*100
= 94.75%
4
𝟓𝟕𝟖𝟎 𝟓𝟎𝟓𝟓
3 . Fisher’s IN = √ ∗ 𝟓𝟑𝟑𝟓 ∗ 𝟏𝟎𝟎
𝟔𝟎𝟖𝟎
= 94.91%
4 . Dorbish and
Bowley’s IN = 94.91%
∑𝑝1𝑞
5 . Kelly’s IN = *100
∑𝑝0𝑞
5417.5
= *100
5707.5
= 94.92%
5055+5780
6.Marshal Edgeworth,s IN = (5335+6080 )*100
10835
= *100
11415
= 94.92%
2. Construct the IN’s of Price for the following by applying
1. Laspeyre’s
2. Paahche’s
3. Bowley
4. Fishers
5. Marshal Edgeworth
Commodity Price Qty Price Qty
2002 2002 2003 2003
A 03 15 03 12
B 07 20 05 10
C 06 25 08 20
D 05 30 04 25
𝑞 𝑃0 𝑞0 𝑃1 𝑞1 𝑃0 𝑞0 𝑃0 𝑞1 𝑃1 𝑞0 𝑃1 𝑞1
13.5 3 15 5 12 45 36 75 60
15 7 20 8 10 140 70 160 80
22.5 6 25 8 20 150 120 200 160
5
27.5 5 30 4 25 150 125 120 100
____ _____ ______ _____
485 351 555
400
∑𝑝1𝑞0
1. Lasperyre’s IN = *100
∑𝑝0𝑞0
555
= *100
485
= 114.43%
∑𝑝1𝑞0
2. Paashche’s = *100
∑𝑝0𝑞0
400
= *100
351
= 113.96%
555 400
3. Fishers IN = √485 ∗ 351*100
= 114.196%
𝐿+𝑃
4. Bowley’s IN = 2
= 114.195%
477.5
5. Kelly’s IN = *100
418
= 114.23%
𝑃1 𝑞 𝑃0 𝑞
675 405
120 105
180 135
110 137.5
______ ______
4775 418
6. Marshal Edgeworth’s
400+555
IN = *100
351+485
955
= *100
836
6
= 114.23%
There is 14.1 rise in price in 2003 compared to 2002.
Why Fishers Index Number is said to be Ideal?
Fishers Index Number is satisfying several tests of adequacy such as,
• Unit test
• Time reversal test
• Factor reversal test
• Circular test
1. Unit Test:
According to this test, the index should be independent of the units in
which the price or quantity is quoted. All formulae satisfy this unit test except
the simple aggregative index.
2. Time Reversal Test:
Time reversal test is one in which the formula should give the same ratio
between the years irrespective of the base or current year and no matter which
of the two times is taken as base. That is between two years whatever is taken
as base year or current year the index number should give the same ratio. This
test is symbolically denoted by the following relation:
P01 x P10 = 1
Where P01 is the index of the year 1 taking year 0 as base and P 10 is the index
for year 0 taking the year 1 as base. If the formula does not satisfy the time
reversal test, it is implied that there is time bias. Fisher’s ideal formula satisfies
the test which is explained below:
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
P01 = √∑𝐏𝟎𝐪𝟎 𝒙 ∑𝐏𝟎𝐪𝟏
∑𝐏𝟎𝐪𝟏 ∑𝐏𝟎𝐪𝟎
P10 = √∑𝐏𝟏𝐪𝟏 𝒙 ∑𝐏𝟏𝐪𝟎
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏 ∑𝐏𝟎𝐪𝟏 ∑𝐏𝟎𝐪𝟎
P01 x P10 = √∑𝐏𝟎𝐪𝟎 𝒙 𝒙 ∑𝐏𝟏𝐪𝟏 𝒙 = √𝟏 = 1
∑𝐏𝟎𝐪𝟏 ∑𝐏𝟏𝐪𝟎
Since P01 x P10 = 1 the Fishers Ideal Index satisfies the test.
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3. Factor Reversal test
According to factor reversal test, the product of a price index and the
quantity index should be its value index. Fisher says that as the time reversal
gave the same or consistent results, the interchanging of the factors i.e. prices
and quantities should also give the consistent results. That means change in
price multiplied with change in quantity should be equal to the change in the
value. This test is symbolically stated as,
∑𝒑𝟏𝒒𝟏
P01 x Q01 = ∑𝒑𝟎𝒒𝟎
4. Circular Reversal test
𝑃01 ∗ 𝑃12* 𝑃20 = 1
Let us apply the time reversal test and factor reversal test taking the previous
example:
Time Reversal Test
Fishers
∑𝐏𝟏𝐪𝟎 ∑𝐏𝟏𝐪𝟏
𝑃10 = √∑𝐏𝟎𝐪𝟎 ∗ ∑𝐏𝟎𝐪𝟏
𝟑𝟓𝟏 𝟒𝟖𝟓 𝟓𝟓𝟓 𝟒𝟎𝟎
𝑃010 ∗ 𝑃01 = √( ∗ 𝟓𝟓𝟓 ) ∗ (𝟒𝟖𝟓 ∗ 𝟑𝟓𝟏 )
𝟒𝟎𝟎
= 1
Laspeyre’s IN
8
∑𝑝0𝑞1
𝑃10 = ∑𝑝1𝑞1
𝟑𝟓𝟏 𝟓𝟓𝟓
𝑃01 ∗ 𝑃10 = (𝟒𝟎𝟎 ∗ 𝟒𝟖𝟓 )
╪ 1
Paashche’s IN
∑𝑝0𝑞0
𝑃10 = ∑𝑝1𝑞0
𝟒𝟖𝟓 𝟒𝟎𝟎
𝑃01 ∗ 𝑃10 = (𝟓𝟓𝟓 ∗ 𝟑𝟓𝟏 )
╪ 1
Factor Reversal test
∑𝐪𝟏𝐩𝟎 ∑𝐪𝟏𝐩𝟏
𝑞01 = √∑𝐪𝟎𝐩𝟎 ∗ ∑𝐪𝟎𝐩𝟏
∑𝑝1𝑞1 400
=
∑𝑝0𝑞0 485
2
√(400 ) 400
=
485 485
400 400
=
485 485
3. Calculate Fishers Ideal Index and prove time reversal and factor reversal
tests.
2010 2011
𝑃0 𝑞0 𝑃1 𝑞1
5 20 7 24
6 18 8 21
8 16 10 20
9 18 11 18
9
10 20 12 16
𝑃01 ∗ 𝑃12* 𝑃20 = 1
∑p1q0 ∑q1p1 ∑p2q1 ∑p2q2
√(∑p0q0 ∗ ∑p0q1 )*√(∑p1q1 ∗ ∑p1q2 )
p1q2 ∑p0q0
( ∗ )
∑p2q2 ∑p2q1
∑p1q0 ∑p2q1 ∑p0q2
√ ∗ ∗
∑p0q1 ∑p1q2 ∑p2q0
Time Reversal test
𝑷𝟎 𝒒𝟎 𝑷𝟏 𝒒𝟏 𝑷𝟎 𝒒𝟎 𝑷𝟏 𝒒𝟎 𝑷𝟏 𝒒𝟏 𝑷𝟎 𝒒 𝟏
5 20 7 24 100 140 168 120
6 18 8 21 108 144 168 126
8 16 10 20 128 160 200 160
9 18 11 18 162 198 198 162
10 20 12 16 200 240 192 160
698 882 926 728
∑p1q0 ∑q1p1
𝑃10 = √(∑p0q0 ∗ ∑p0q1 )
882 926
= √( ∗ 728 )
698
∑p0q1 ∑p0q0
𝑃10 = √(∑p1q1 ∗ ∑p1q0 )
882 926 728 698
𝑃01 ∗ 𝑃10 = √(
698
∗ 728 ) √(926 ∗ 882 )
10
= 1
𝑃01 ∗ 𝑃10 = 1
Factor Reversal Test
∑𝑝1𝑞1 ∑𝑝1𝑞1
√ =
∑𝑝0𝑞0 ∑𝑝0𝑞0
9262
√( )
698
926
698
926 926
Therefore =
698 698
Circular Test
Fishers – Simple Aggregate Method
∑𝑃1 ∑𝑃2 ∑𝑃0
∗ ∗ = 1
∑𝑃0 ∑𝑃1 ∑𝑃2
Kelley’s – Fixed Weighted Aggregate method
∑𝑃1𝑞 ∑𝑃2𝑞 ∑𝑃0𝑞
∗ ∗ = 1
∑𝑃0𝑞 ∑𝑃1𝑞 ∑𝑃2𝑞
4. For the data given below, calculate Index No. by taking
(i) 1995 as base year
(ii) 2002 as base year
(iii) 1995 – 97 as base period
(iv) Chain Index Numbers
year Price of Commodity
X
1995 4
1996 5
1997 6
11
1998 7
1999 8
2000 10
2001 9
2002 10
2003 11
𝑃1
Index Number = ∗ 100
𝑃0
1995 –
IN (1995 IN (2002
Chain 97 as
Year Price as as Base
Index Base
BaseYr.) Yr.)
Period)
100 95 4 100 40 100
125 96 5 125 50 100
120 97 6 150 60 100
116.67 98 7 175 70 140
114.20 99 8 200 80 160
125 2000 10 250 100 200
90 2001 9 225 90 180
111.11 2002 10 250 100 200
110 2003 11 275 110 220
4+5+6
(i) = 5
3
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