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1. Presentation Of
Index Number

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Index Number (P01)
Unweighted Weighted
Single
Aggregative
Simple Average
of Relatives
Weighted
Aggregative
Weighted Average
of Relatives
Laspeyses
Method
Passches
Method
Dorbish &
Bowleys
Method
Fishers
Ideal
Method
Marshall
Edgeworth
Method
Kellys
Method

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Index Numbers
Price Index
Numbers
Value Index
Numbers
Quantity
Index
Numbers
Special
Purpose
Index
Numbers
Classification of index numbers:

4. Price Index Numbers:
Price index number measure the relatives price changes. So
that a comparison between the values for any two periods or price
will show the average change in prices between periods or the
average difference in prices between place.
Value index numbers:
An index number firmed from the ratio of aggregate values in
the given period to the aggregate values in the base periods.
Quantity index numbers:
An quantity index number measure changes in consumer
goods.
Special purpose index numbers:
An index number designed to measure changes in the general
price level in a country would be general purpose index
numbers
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5. Introduction
An index number is a statistical device for measuring changes in the magnitude of a
group of related variables. It represents the general trend of diverging ratios, from
which it is calculated. It is a measure of the average change in a group of related
variables over two different situations.
Index numbers measure a net or relative change in a variable or a group of
variables. ● For example, if the price of a certain commodity rises from ₹10 in the
year 2007 to ₹15 in the year 2017, the price index number will be 150 showing that
there is a 50% increase in the prices over this period.
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6. Meaning Of Index Numbers
An index number is a method of evaluating variations in a variable or group of
variables in regards to geographical location, time, and other features. The
base value of the index number is usually 100, which indicates price, date, level
of production, and more.
There are various kinds of index numbers. However, at present, the most
relatable is the price index number that particularly indicates the changes in
the overall price level or in the value of money)for a particular time
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7. The value of money is not constant, even if it falls or rises it will affect
and change the price level. An increase in the price level determines a
decline in the value of money. A decrease in the price level means an
increase in the value of money.
Therefore, the differences in the value of money are indicated by the
differences in the overall price level for a particular time. Therefore,
the changes in the overall prices can be evaluated by a statistical
device known as ‘index number.’
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8. Definition of index numbers
According to Croxton and Cowden :
index numbers are devices for measuring differences in
the magnitude of a group of related variables. ”
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9. According to Spiegal :
An index number is a statistical measure
designed to show changes in a variable or a
group of related variables with respect to
time, geographical locations, or other
characteristics.
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10. Q. 1 Briefly discuss the problems involved in
the construction of index numbers
Answer :-Following are some of the problems involved in the construction of
index numbers:
(1) Purpose of index numbers :- Many different types of index numbers are
constructed with different objectives.
● Example: Price index, quantity index, consumer price index, wholesale price index,
and more
● So, the first important issue/problem is to define the objective for which the index
number is to be constructed.
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11. (2) Selection of base period :-
Base period is the period against which the comparisons are
made.
● Selection of a suitable base period is a very crucial step.
● It should be of reasonable length and normal one, i.e., it should
not be affected by any abnormalities like, natural calamities, war,
extreme business cycle situations.
●It should neither be too close nor too far.
(3) Selection of commodities:- All the items cannot be included in the
construction of an index number.
● Nature and number of items to be included in an index number
depends upon the type of index to be constructed.
●For example, to construct a ‘consumer price index’ those
commodities should be considered that are generally consumed
and the number should be either too small nor too big.
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12. (4) Selection of sources of data :-
Depending upon the type of index numbers, the correct source
should be selected for data.
● Like, to construct CPI, we need retail prices and to construct the
wholesale price index, we need wholesale prices. Accordingly, the
right and reliable source should be selected.
(5) Selection of weights :-
The term ‘weight’ refers to the relative importance of
different items in the construction of index numbers.
● All the items do not have the same importance.
● So, it is necessary to adopt some suitable measures to
assign weight.
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13. Q.4 What are the major limitations of index
numbers?
Answer : Following are the major limitations of index numbers:
(1) Difficulty in construction of index numbers:-
The decision of objective, selection of base period, selection of
commodities, selection of sources of data, selection of ‘weights’,
selection of formula, and more are the several difficulties in the
construction of index numbers.
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14. (2) Based on sample items, so only approximate indicators:-
Index numbers are generally based on a few sample items. So, the
results derived are approximate and not perfect.
(3) Ignores quality of commodities :-
These days the quality changes occur very fast and the index
numbers ignore this aspect.
●So, the results shown by these may not be appropriate.
(4) Limited use :-
There is no ‘master index number’ or ‘all in one index number’.
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15. There are two methods of computing the index
numbers:-
(a) Simple index number.
(b) Weighted index number.
Simple index number again can be constructed either by –
(i) Simple aggregate method, or by (ii) simple average of price relative’s method.
Similarly. weighted index number can be constructed either by (i) weighted
aggregative method, or by (ii) weighted required and the average of price
relative's method. The availability of the data, degree of accuracy required and the
purprose of the study.
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16. Construction of price index numbersthrough various methods can be understood
with the help of the following examples:
1. Simple Aggregative Method:
In this method, the index number is equal to the sum of prices for the year for
which index number is to be found divided by the sum of actual prices for the base year.
The formula for finding the index number through this method is as follows:
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17. Construction of price index numbers through various method can be
understood with the help of the following example :
1. Simple Aggregative Method :-
In this method, the index number is equal to the sum of prices for the
year for which index number is to be found divided by the sum of actual prices
for the base year.
2. Simple Average of Price Relatives method:
ADVERTISEMENTS:-
In this method, the index number is equal to the sum of price relatives divided
by the number of item
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18. 3. Weighted Aggregative Method:
In this method, different weight are assigned to the item according to their
relative importance. weights used are the quantity weight . Many formula have
been developed to estimate index numbers on the basis of quantity weights.
4. Weighted Average of Relatives Method:
In this method also different weights are used for the items according to their
relative importance.
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19. Thank you
Shruti Arora